Level 3’s Other Stealth M&A: IP Networks Inc

May 1st, 2013 by · 14 Comments

Thanks to a few helpful readers who chimed in last night since I obviously hadn’t dug up the news, we now know of another metro fiber deal currently pending. Level 3 Communications (NYSE:LVLT, news, filings) is apparently in the process of buying the San Francisco Bay Area’s IP Networks Inc. (IPN).

TRImage257 130501 06.01IPN has spent most of its time well under the radar, but operates some 750 route miles of Californian fiber hooking up 140 enterprise buildings and 33 data centers with particular depth in downtown San Francisco itself.  Recently they also built a fiber route up to Eureka to the north.  It’s built off of electric utility rights of way, and a few years back won a T-MobileUSA wireless backhaul deal for the metro area.

The assets will help boost Level 3’s ability to serve enterprises in the Bay Area. Their network assets in California have historically been wholesale-focused as compared to the east coast where some of the metro fiber M&A’s of years past gave them more enterprise depth.

In terms of size, this purchase will be quite small and non-material for Level 3. But along with the FiberSpan deal over in the UK in the second half of last year, it reflects a much more understated approach to M&A by the folks in Broomfield. They’re buying interesting fiber assets that will help them reach more customers, yet deliberately staying under the radar unless it’s a major deal that forces them into the open.  I wonder if they have further targets of this type already in the works.


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Categories: Internet Backbones · Mergers and Acquisitions · Metro fiber

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14 Comments So Far

  • ABC says:

    Will this be massive M&A be able to keep the share price above $20?

  • Anonymous says:

    Carl, How did we trade your nonsense out for this guy? ABC this board is about business and industry drivers, not your daily update on stock prices.

    Please see cnbc.com for your stock quotes and the yahoo message board for others providing ‘high content’ updates like these.

    • anon says:

      At least ABC’s comments are (1) clear, (2) concise and (3) absent any meandering comments on conspiracies.

      I’ll take ABC’s cheeky LVLT stock reports any day over Carl’s worthless rambling diatribes.

  • toddforthree says:

    Thank you anonymous for you post above

  • ABC says:

    Boy, you LVLT baghol…oops, I mean ‘savvy longs’ sure are a sensitive bunch.

  • Justgo says:

    Rob, could this help explain the 15M in additional 4Q costs?

  • anon says:

    (1) Are we 100% certain this transaction has actually closed?

    (2) More importantly, regardless of whether or not this deal has closed, this transaction appears to have been approved by both boards. Consequently, I’m confused how Level 3 avoided an SEC 8k or 10q disclosure about this transaction.

    I recognize that under GAAP rules the materiality threshold is set by Level 3’s auditors, but this transaction would have to be quite small for their auditors not to require some type of disclosure.

    This is a company with Q1 2013 long term debt of $8.5b (up from Q1 2012 long term debt of $8.1b), had $733m in debt service last year and Q1 2013 cash of $610 down from $748m in Q1 2012.

    It’s a bit disturbing that a company that has failed to produce any shareholder value over the last decade is playing footloose with disclosure rules.

  • SFBay says:

    It might also be fun to have their EPS normalized against executive compensation 🙂

    • anon says:

      unfortunately, these days executive performance has little to do with executive compensation. The bigger the company the better the executive compensation, including the outsized severance packages that accompany the final failure. In other words, size matters. 😉

      Until mutual funds, pension funds and other large investors insist on pay for performance, instead of pay for size, executive compensation will remain disconnected from performance.

      Look at our friend Mr. Crowe who by all stockholder measures was a complete failure. Yet every year the board showered him with new equity in the form of either stock options or Restricted Stock Units (RSUs). A simple solution would have been to tie the life of each RSU grant to specific measurable performance metrics and claw back those RSUs for failure. For example, a 2007 grant should have required that he generated $x in Revenue, $y in EBITDA and $z in free cash flow by 2009. His 2008 grant should have required $x, $y & $z by 2010. If he fails to deliver, take back the shares. Instead, at least 50% of the RSU and stock option grants were simply time-based.

      (Why do boards issue any time-based RSUs to executives? Precisely what principle of capitalism does a time-based, rather than a performance-based, RSU grant capture? I can’t think of any reason to give a CEO time-based RSUs, especially when CEOs and other executives have termination contracts that result in vesting any unvested RSUs and options upon termination.)

      Adding insult to injury to stockholders in this perverse system of executive compensation, the lower priced shares that resulted from failure the previous year lead to a larger number of shares granted to executives in the next year. This is because they take the $1m dollar (or whatever number the board uses) they automatically set aside for each executive RSU grant and simply divide it by the current stock price. A lower stock price from last year’s failure means more shares this year.

      Annual executive RSU grants have become automatic in our system of executive compensation. This is nothing more than executive welfare. People, rightly, pine away about the continuing growth of food stamps, but turn a blind eye on executive welfare payments granted annually in the form of RSUs to executives.

      One’s private while the other’s public, you might say. Unfortunately, your 401k plans that many will require to retire suffer from this practice because these annual RSU grants to ineffective executives, effectively, steal shareholder wealth through dilution and, more importantly, poor performance.

      apologies for the diatribe.

      • Anonymous says:

        you are dead on
        one problem is no direct accountability from compensation committees for these non-performing execs

  • Just saying... says:

    When will Level 3 announce that they have lost one of their largest conferencing customers (in excess of $1.2 Million/month). If I were a betting person, I would say very soon…and how will this be accepted on Wall Street?

  • Anonymous says:

    In response to ANON not only is CEO compensation out wack, what accountability to COO who managed the company for 5 years losing ~200 million annually or improving process and systems and scary statement recently we cant activate what we sell. Oh yeah promote him to CEO. I know this is all Jim Crowe doing or KOH doing but accountability is missing, Jim Crowe bought himself 5 years of compensation when KOH was scapegoated as problem.

    What about Buddy Miller the man behind the M&A curtain. All 8 or so, great strategist and due diligence to evaluate and properly understand landscape to win bids. Oh waut 200 Million for ICG Loser, 1 billion for Broadwing Loser, 1 Billion for wiltel loser, 1 billion for telcove loser, and most recently GC loser. I say loser because none of the M&A have delivered sustainable free cash flow. Just being busy does not make successful performance.

    • anon says:

      I completely agree. Here’s the dirty little secret of the Level 3, many other acquiring companies, mergers: They pay the expected synergy savings to the target company up front.

      On the one hand, it may make sense to pay the target company for the expected merger synergy savings because you have to incentivize the seller to sell the company. On the other hand, especially in a horizontal mergers where large op-ex savings can be achieved through eliminating duplicate workforces, the savings can’t be achieved without joining the companies, so the value should go to the acquiring company that has to do all the work to realize the full value. But, as a rule, the premium acquiring companies pay target companies are based on expected synergy savings minus cap-ex to make them happen.

      The expected synergies savings are jointly shared and developed during the due diligence process by both acquiring and target companies. The selling company wants to make them as high as possible to demand the very best price for its shareholders. The problem with this model, of course, is that the acquiring company pays for the synergy savings up front with the premium it pays to the target company’s shareholders and THEN the acquiring company has to make those synergies happen. This could take as much as 2-4 years. As a result the new company often loses value until those synergies are realized.

      So once the synergies are achieved, there’s really no new value creation from the forecasted synergies because the acquiring company has already paid the target company’s shareholder for those synergies 2-4 years ago.

      Ultimately, new value creation comes from “enhanced synergies” not baked into the original plan, for example, incremental sales from a larger footprint and, of course, the associated larger margins on incremental sales from the improved cost structure.

      In the meantime, executives at the new company get bigger salaries, bigger bonuses, including special bonuses for merger-related activity, and bigger RSU grants for managing a larger more complex enterprise. And executives at the target company cash out.

  • Anonymous says:

    Why haven’t we heard from ABC, is he at Ira Sohn?

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