High-speed DSL carrier could be takeover target, analysts say

Though the company and analysts said it would be poor timing to merge with any potential suitor with a depressed stock price, the scuttlebutt raises lingering questions about how long high-speed network providers, such as the group of digital subscriber line (DSL) operators, will remain independent.

Covad shares fell more than 12 percent in midday trading today, giving back much of the gains made earlier this week that analysts attributed to takeover rumors. No particular suitor was named, though a wide array of larger companies could be interested in a firm such as Covad, according to analysts.

A nationwide wholesaler of high-speed DSL, Covad is among a group of similar companies known as competitive local exchange carriers (CLEC), including NorthPoint Communications, Rhythms NetConnections, DSL.net, Network Access Solutions and several others.

These DSL providers are installing high-speed, or "broadband," networks across the country, which are attractive assets for larger competitors that want to provide faster Internet connections for their business and residential customers.

With the large telecommunications players looking to extend their reach to tap more customers at the point where they connect to a network using a high-speed line such as DSL, it may be only a matter of time before Covad and its competitors get swallowed, according to analysts.

"Once the first one goes, then there will be a big scramble for the others," said Adam Giansiracusa, managing director for technology stocks at Frost Securities.

After a three-month slide that culminated in a new 52-week low of $19.06 this week, stock in Covad had gained more than 30 percent as investors speculated the company's low stock price would make it an attractive buyout candidate. Previously, Covad's stock performance had outpaced that of its nearest competitors.

However, Covad representatives and financial analysts today refuted the recent rumors. "Totally unsubstantiated rumors," said a Covad spokeswoman.

Analysts said Covad is unlikely to be receptive to a takeover now for a variety of reasons.

"They're not selling themselves at these levels. Not after seeing a $66 stock price. That's not the kind of premium they want," Giansiracusa said. "A company with $1 billion in cash and things going right doesn't put itself on the market."

Additionally, Giansiracusa said the stock's downturn today, combined with a batch of recent insider stock sales by executives, are indications that the current Covad merger rumors are false. Executives would be prohibited by law from selling shares if they possessed secret knowledge of pending merger negotiations. Those insider sales also likely contributed to the stock's recent slide, analysts said.

"The stock was down to 19, and it was looking for a reason to recover. And it doesn't take much when someone says the word acquisition," Giansiracusa said.

Still, the market rumors highlight the attractive nature of the DSL providers' assets, particularly at these depressed stock levels. Analysts said they expect to see some of the DSL providers eventually become buyout targets.

"Given that the stock had been knocked down so far, it becomes a more realistic takeover target," said Mark Langner, managing director for research at Epoch Partners. "It's not only the fact that the stock has fallen so far, but it does have valuable assets."

Analysts said the corporate culture differences between the DSL companies and more traditional phone firms could prove vexing in the event of a takeover. But the Baby Bells would like access to the out-of-region customers a Covad could provide.

In addition, long-distance phone companies such as MCI WorldCom and Qwest Communications International could also be interested, hoping to gain a greater chunk of the high-speed, or "broadband," Internet access market.