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Busy signals

by Chris Nolter  |  Published November 19, 2012 at 2:00 PM
Verizon Communications Inc. confronts one of the most complex and dynamic landscapes imaginable in American business. Given its enormous size and network needs, and the challenge of expanding a more-than $110 billion top line, the New York-based carrier has had to take the long view, which this year's Most Admired Corporate Dealmaker survey respondents rated highly.

The company has won plaudits not just for its willingness to chase critical assets in a variety of areas, but to excel at divestitures. Verizon shareholders who held stock of some spunout businesses, however, might give those transactions lower scores.

"The deals focus on assets that are in their growth businesses, such as cloud computing and wireless," said Dennis Saputo of Moody's Investors Service. "For an asset that they want, they don't seem to worry too much about paying a higher multiple than is typical in the market."

For example, to bulk up its cloud computing holdings, Verizon acquired data center operator Terremark Worldwide Inc. in 2011 for $1.4 billion, which analysts put at 13 to 14 times Ebitda.

Terremark was one of the larger independent data center operators. Amid a flurry of sector M&A, the deal and the price grabbed attention. Terremark and cloud offerings are part of Verizon's strategic services unit, which has offset declines in its wireline business.

This year, Verizon Wireless, the wireless joint venture between Verizon and Britain's Vodafone Group plc, paid cable operators $3.9 billion for spectrum licenses covering 93% of the U.S. population that will aid deployment of its wireless broadband product. It also struck deals with T-Mobile USA Inc., Leap Wireless International Inc. and others to pad its spectrum portfolio. Verizon Wireless scored a major buyout in 2009 with the $28.1 billion purchase of Alltel Corp. from TPG Capital and Goldman Sachs Capital Partners. "They had been talking on and off with Alltel for years," said Roger Entner, a wireless consultant who runs Recon Analytics LLC.

Network quality has been a hallmark and marketing point for Verizon Wireless, and its spectrum position undergirds the service. "Network quality is paramount," Entner added. "It's really network leadership that this company has been built on."

Not surprisingly, Verizon's corporate dealmaking organization has considerable visibility inside the big telecom. Verizon executive vice president of strategy, development and planning John Diercksen reports to chairman and CEO Lowell McAdam, and directs M&A that affects Verizon as a whole, including wireless. Diercksen, who was unavailable for an interview, has held that role since 2003, when Ivan Seidenberg was chairman and CEO.

Verizon Wireless vice president of business development Molly Feldman reports to Dan Mead, who is CEO of the wireless JV and who in turn, reports to McAdam.

Diercksen's team includes senior vice president of corporate strategy Roy Chestnutt, who develops strategic plans for new markets and other areas; vice president of corporate development Stephen Smith, who has led teams working on wireline divestitures and the acquisition of MCI Inc.; and John Fitzgerald, vice president of strategy, development and planning, who worked on the Hughes Telematics acquisition and other major deals.

Verizon has been less aggressive than rival AT&T Inc., which was the runner-up this year in the survey. AT&T, ranked No. 2 in the U.S. in wireless behind Verizon Wireless, launched the blockbuster acquisition of T-Mobile USA but had to pull the deal after resistance from the government emerged.

Verizon did 21 acquisitions during the survey period from 2007 through 2011. There have been blockbusters such as Alltel. There have also been building-block acquisitions of companies such as information security company Cybertrust Holdings Inc. and cloud software developer CloudSwitch Inc.

Voters cited Verizon's reputation, long-term strategy and skills at strategic acquisitions. One respondent noted that Verizon has a knack for knowing when to buy or sell, and has been just as "brilliant" with divestitures as with acquisitions.

McAdam predecessor Seidenberg, who left the company in 2011, divested phone book publishing and rural phone lines that would slow top-line growth. "Ivan was a master of getting rid of their unprofitable lines and leaving someone else to hold the bucket," Entner said.

Some spins were less successful for shareholders who held onto the stock. Idearc Inc., spun off in 2006, before our survey period, also went bankrupt.

Verizon broke off rural wireline operations in 2008 and combined them with FairPoint Communications Inc. in a $2.7 billion, tax-free merger. The deal improved Verizon's balance sheet, though FairPoint wound up in bankruptcy protection.

The 2005 sale of Verizon's Hawaiian unit to Carlyle Group for $1.7 billion also resulted in a Chapter 11 filing, though the transaction predates our survey.

The telecom had a similar rural landline deal with Frontier Communications Inc. Shares of Frontier, some presumably in the hands of Verizon investors, have declined significantly since the deal closed in 2010.

Verizon may have increasing difficulties competing in future dealmaker competitions. The company is now so large that the Federal Communications Commission and the antitrust agencies would likely squelch ambitious moves.

There is, however, one very large deal residing within Verizon: Verizon Wireless. The parent could finally make the much-discussed move to buy out Vodafone's 45% stake. But such a deal, which could exceed $80 billion, might be too large and complex for even Verizon to attempt.

As for megadeals, McAdam said he is "not chomping at the bit" in a September investor call.

"I'm a fan of the IBM approach," he said. "They do hundreds of acquisitions, but they're all small pieces to the puzzle that create a very rich picture."

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Tags: Alltel Corp. | antitrust | AT&T Inc. | Carlyle Group | CloudSwitch Inc. | Cybertrust Holdings Inc. | Dan Mead | data center | FairPoint Communications Inc. | Federal Communications Commission | Frontier Communications Inc. | Goldman Sachs Capital Partners | Hughes Telematics | IBM | Idearc Inc. | Ivan Seidenberg | John Diercksen | John Fitzgerald | joint venture | Leap Wireless International Inc. | Lowell McAdam | MCI Inc. | Molly Feldman | Most Admired Corporate Dealmaker | Roy Chestnutt | Stephen Smith | T-Mobile USA Inc. | Terremark Worldwide Inc. | the cloud | TPG Capital | Verizon Communications Inc. | Verizon Wireless | Vodafone Group plc | wireline

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Chris Nolter

Senior Writer: Media & Telecom



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