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IXC confirms possible merger talks

An executive confirms the emerging carrier has held tentative merger talks with PSINet and at least three domestic carriers may be interested in buying the company.

BURLINGAME, California--IXC Communications has held tentative merger talks with PSINet and at least three domestic carriers may be interested in buying the emerging carrier, a company executive confirmed.

Last month IXC said it was exploring "various strategic alternatives," including joint ventures or the sale of the company. IXC, one of a handful of upstart telecommunications carriers, has held discussions with many companies in the past six months, according to Dominick DeAngelo, senior vice president at IXC.

But DeAngelo would not comment on whether a deal is imminent or if IXC is currently in talks with any of the regional Bell operating companies (RBOCs), which some industry observers have said would be likely partners.

Analysts note that the company has trailed the market performance of competitors like Qwest Communications International and Level 3 Communications, a situation executives may be able to remedy by creating a joint venture or selling the firm outright.

"Management hasn't been able to leverage the assets they have built in the most satisfying manner," said Eric Melloul, an analyst with Argus Research. "They have decided that selling would be one of the best options to unlock the value inherent in the network."

DeAngelo said that IXC hired Morgan Stanley Dean Witter nearly six months ago and has held discussions with many companies since then.

"I think IXC has been looking around for a while," said Nancy Kaplan, vice president at Renaissance Worldwide, a Boston-based business and technology management consulting firm.

IXC is part of a new breed of telecommunications carriers building packet-switched networks, which are more efficient than many existing long distance networks. Qwest, Level 3, Frontier, Williams Communications, and Enron also are laying thousands of route miles of fiber optic lines, hair-like strands of glass that deliver data as pulses of light.

If IXC agrees to a merger it would be the first of the new networks to be sold and could set the valuation against which potential future takeovers would be measured.

The company may be facing a difficult sell, however, since most long distance companies have already built their own U.S. networks, and the Baby Bell companies are still barred from entering the long distance business.

"There aren't that many buyers who are in need of a network," Melloul said.

Possible partners
According to a report in Business Week, PSINet and Global Crossing are reportedly interested in IXC, as is British telecommunications carrier Cable & Wireless.

IXC owns a minority share in PSINet, and has sold the business-focused ISP considerable fiber optic cable capacity. But some analysts say that relationship is unlikely to result in any kind of buyout.

With only about $500 million in cash left from a round of financing last year, an attempt to acquire IXC--which claims a market capitalization of about $1.9 billion--could leave PSINet cash-poor and hard-pressed to pursue its other goals.

Some analysts do say the ISP would benefit from owning its own infrastructure, however. "It's an issue of how big they expect to be at some point, and whether they need their own network," said Frank Governali, an analyst at CS First Boston.

A PSINet spokesperson said the company frequently talks to IXC, since they are already partners, but would not comment on any potential merger or acquisition discussions.

Argus said that Global Crossing could be a more attractive candidate. The undersea fiber optic cable company is expanding rapidly in Europe, and IXC's advanced U.S. network would complement this well, some analysts say. However, DeAngelo said he was unaware of any prior or current negotiations with Global Crossing, a company valued at nearly $8 billion.

Other observers say that a local telephone company, such as BellSouth or Bell Atlantic, might be interested, despite regulatory hurdles that would likely block their acquisition of a long distance provider.

Kaplan noted that IXC and Bell Atlantic have worked together on asynchronous transfer mode (ATM) networks in the past and the Baby Bell is expected to be the first local phone giant to gain regulatory approval to enter the long distance market.

"Bell Atlantic is in a growth mode and an acquisition mode so that would make sense," she said.

Looking for a way out?
Some analysts said IXC has had trouble landing large corporate accounts and that has lead to a financial squeeze.

The company posted a net loss of $162.5 million, or $6.15 a share, for the 1998 fiscal year, wider when compared with a net loss of $99.2 million, or $3.47 per share, in 1997.

IXC has started offering services on its Gemini2000 network, targeted at both commercial and education and research uses. IXC has finished 9,300 miles to date and expects to have 16,500 miles of fiber in the ground by the end of the year.

Like most maturing industries, the fiber optic telecommunications carriers are expected to face a period of consolidation.

Many analysts believe IXC, and most of the other next generation carriers, are just preparing what is known as an "exit strategy," dressing themselves up to be attractive takeover candidates.

"They're all going to get bought," said Mark Winther, group vice president for worldwide telecommunications at International Data Corporation, a market research firm. "Twelve months from now this market is going to be unrecognizable."

Once the Baby Bells are turned loose in the long distance market, many will come looking for partners with national networks, analysts predict, "because there's not that many long distance state-of-the-art networks and time to market is everything," Winther added.

SBC Communications already has a relationship with IXC competitor Williams, which has allowed Williams to speed its network buildout plans and prompted speculation that SBC will eventually acquire the company. Williams' planned IPO is now expected in April.