A Merger Frenzy Rich in Fiber MAYBE THE SAYING SHOULD BE, "BREED LIKE TELECOMS"
By Julie Creswell

(FORTUNE Magazine) – A couple of months ago no one outside the telecommunications business had heard of Global Crossing. Then the Bermuda startup, which is laying fiber-optic cable across the bottom of the world's oceans, hired a top AT&T executive, Robert Annunziata, to be its CEO. Then it bought U.S. long-distance provider Frontier, a much bigger company. And just like that, Global Crossing became a global telecom contender that will have revenues of $4 billion and a $30 billion market cap--and will be competing against giants like MCI WorldCom.

It's a crazy, mixed-up telecom world, and it's only going to get crazier. An explosion in Internet traffic, ample capital for startups, and falling regulatory barriers are about to bring on an unprecedented wave of mergers in the industry. A decade from now a handful of global giants that offer local and long-distance phone, Internet, cable, wireless, and paging services will most likely dominate the market, says Jeffrey Kagan, a telecom industry analyst and author of Winning Communications Strategies. And nowhere is it written that today's national front-runners--AT&T, Deutsche Telekom, British Telecommunications, and the like--will be the leaders of tomorrow. In fact, fast-moving startups like Global Crossing, Level 3, and a tiny Dutch company called Equant, which are constructing state-of-the-art global Internet data and voice networks, already have a huge technological leg up on the incumbents.

If the incumbents are to win, let alone survive, Kagan says, "[they] have to expand and transform what they are. They can't just offer a full range of services here in the States, but must link with other companies globally to provide global connectivity." For the most part, the big telecom companies' strategy for achieving "global connectivity" has been to enter into joint ventures with their counterparts abroad. But barely a week after Global Crossing's deal with Frontier, reports surfaced that one of those joint ventures, Global One, was on the verge of disbanding. The alliance between U.S. long-distance provider Sprint, Germany's Deutsche Telekom, and France Telecom has suffered from a lack of a cohesive strategy, partner squabbles, and losses due to difficulties in integrating systems. Last year Sprint's losses from the group totaled $186 million. The three rushed to squash the breakup rumor. Analysts say it's only a matter of time before this venture crumbles.

The problems aren't unique to Global One. Concert, the $1 billion joint venture BT and MCI established in 1994, stumbled when Worldcom bought MCI in 1998. Unisource, made up of the Netherlands' KPN, Swisscom, and Sweden's Telia, has had partners jump in and out since 1992. Another joint venture, WorldPartners, has said goodbye to one partner, Australia's Telstra, and now another, co-founder AT&T, wants out.

The reason joint ventures are trouble, says John Sidgmore, vice chairman of MCI Worldcom, is that they can't make decisions fast enough to respond to rapid shifts in technology. "Getting any single telephone company to do something is difficult," he says. "Two is really hard. And three? Forget about it."

That hasn't stopped AT&T and BT from trying again, with a $10 billion joint venture announced in July 1998. (For more on AT&T, see "Mike Armstrong's AT&T: Will the Pieces Come Together?") Once bitter rivals, the two plan to merge their international assets and build an Internet-based global network that will link 100 major cities. Nevertheless, it took the two companies nearly eight months to appoint a CEO (David Dorman, former PacTel chief), and they still haven't figured out what to name this venture. (Names reportedly under consideration include Ignite, Vitality, Joule, Aereos--and good old Concert.)

Perhaps the AT&T-BT alliance will defy the odds and survive. But the trend among big telecoms is obvious: As other joint ventures collapse, the newly free major players are going to be in a rush to make up for lost time. The fear that they're already behind rivals like MCI Worldcom in the race to put together state-of-the-art networks that stretch from Southeast Asia to South Dakota will drive them into cross-border mergers, says Sajai Krishnan, a principal at consulting firm Booz Allen & Hamilton. The easiest and quickest way to get access to a high-speed global data network is to buy an Internet service provider. Companies building cutting-edge national or global networks will also be early takeover targets--companies like Level 3, Qwest, IXC Communications, and Williams Communications. With the help of inflated stock prices, though, these smaller companies could just as easily be the buyers themselves. In the rapidly changing world of telecom, it's hard to say whether a Global Crossing (or, for that matter, an AT&T) is hunter or hunted.

--Julie Creswell