TMNG Global Conducts A Preliminary Evaluation of An Emerging CLEC Under An Extremely Tight Deadline
Challenge
A leading private equity firm wished to evaluate an emerging CLEC, which was being formed by the merger of three small, geographically separated CLECs. The client engaged a TMNG Global team to conduct a preliminary evaluation of the investment potential of the proposed merger. Based upon the results, the client would then determine whether to proceed with a more complete due diligence. The team was faced with a one-week deadline to meet with all three companies and provide its evaluation to the client, focused primarily on technical and operational considerations.
TMNG Global Solution
Our team immediately set up meetings in each of the three city headquarters, with an agenda that covered the following subjects:
- Business plan
- Financials
- Marketing and sales plans
- Services
- Network architecture
- Expansion and integration plans
- Operations
- Back-office processes and systems.
We determined that the three entities provided five basic suites of services: local, long distance, IP, voice, and data. Each entity bundled its services in ways designed to differentiate it and make its products “stickier,” meaning that customers would be less likely to switch to another provider. Although they all provided the basic suite of service, each had some service offerings that at the time was unique to that entity. For example, one CLEC provided co-location facilities to its customers, and another provided residential voice services.
Each entity took a slightly different approach to the “smart build” concept. For example, one tended to lease conduit and pull its own fiber. Another favored purchasing “dark fiber” Unbundled Network Elements (UNEs) from the incumbent. A third preferred to build its own local fiber network.
All three entities used different billing and operations support systems. Managers stated that the combined company would use the “best of breed” system. However, by that term, they seemed to mean the best of their current systems, not necessarily industry-based “best of breed.” The capabilities of one of the homegrown systems were quite impressive and it was to be exported to the other two in the combined entity. Issues of integration, however, had still to be addressed.
The networks were not mature but were evolving. The physical merger of the networks would occur in three phases. Initially, the three entities would continue to operate as “silos,” then they would be interconnected, and finally, they would be fully integrated, both on a network and system level. Details were to be worked out over time. In the near term, plans included expanding by implementing six switches, increasing the number of co-locations by nearly 300 and hiring an additional 600 people, a substantial increase in headcount, all within a six-month period.
The team pointed out that these plans were quite aggressive, considering that the CLECs must rely on the ILEC’s to deliver part of the network and services, and the combined entity would need to order/build interconnecting facilities while installing and migrating the aforementioned BSS/OSS systems. Finally, and perhaps most importantly, competent technical and operation personnel in the telecom industry were in short supply at that time. A key to success would be the ability to maintain operation and expand customer base while at the same time migrating towards full integration.
Our team noted that management was experienced, and this counted a great deal in the fairly daunting task ahead of them. It was clear, nonetheless that the expectations, especially as regards to timing, were unrealistic. Yet, there appeared to be significant potential in the combination of the three entities. Their fundamentals were sound, and there were enough similarities between them to allow for an eventual smooth integration. We recommended that a more detailed evaluation be performed, with the caveat that the time and cost estimates for full integration be increased to more realistic levels.
Benefits to the Client
The client was able to have some confidence that the additional time and money spent investigating the potential of this investment would be well spent. Furthermore, as a result of our findings, the client was given a preliminary understanding of the need to modify the projected time and costs related to the merger. This would be found to hold the client in good stead as it developed its term sheets.