ATLANTIC-ACM DATALINE ANALYSIS: Mutually Beneficial M&A Activity on the Telecom Horizon.

Business Editors/High-Tech Writers

BOSTON--(BUSINESS WIRE)--May 6, 2003

By Dr. Judy Reed Smith

Background:

Venture capital investment declines for 12th straight quarter, reaching eight-year low.

Analysis:

That the number of VC financings sits at an eight-year low is of no surprise to technology and telecommunications firms. However, a number of executives incorrectly assume that a rebound in investment capital will coincide with an industry rebound.

In reality, the VC industry itself is in serious trouble, currently experiencing sustained negative returns (on a multiquarter basis) for the first time in its history. Long gone are the days when investing in all things ending ".com" or "communications" represented a fast track to fat valuations based on potential and huge payoffs via M&A and IPO activities. Without these big wins to counterbalance losses, the VC model itself is now subject to the same Darwinian forces that have wreaked havoc in the technology industries that dominated their portfolios. Many VC executives have begun to realize that the symbiotic nature of their investments is a double-edged sword in a down market and expect the next several years will be rocky. Significant contraction is expected.

What this means for technology and telecom firms is that, when all is said and done, funding sources will not only be more selective than in the past, there will be fewer of them. And with Warren Buffett delivering big via investments in "such exciting businesses as paint companies," new risk tolerances will cut funding sources even further.

Executives anticipating a rebound in venture financing to fuel their companies' next growth stages would be well advised to consider other strategic alternatives. Activities in our sister company Marketplace Analysts Inc. (www.mp-analysts.com) clearly indicate a trend toward distressed asset acquisition in the telecom sector. While these activities can deliver value by virtue of the simple ROI associated with bargain shopping, the energies and focus of these transactions are not forward looking.

We anticipate that the telecom sector will soon begin to follow the lead of the software sector and migrate from bottom feeding to mutually beneficial mergers and acquisitions. These models provide viable avenues to growth and profitability in the absence of funding. Perhaps more importantly given current market dynamics, they can provide scope-oriented benefits that enable firms to develop the product portfolios necessary to compete in the "year of the bundle." Such development is crucial because the largest players in the marketplace, which heavily influence customer expectations for service offerings, are not dependent upon investment to enable their offerings. In other words, competitors that allow their development initiatives to lag for lack of capital will be unable to compete on the bundle-oriented playing field developing before them.

The Bottom Line:

Mutually beneficial M&A activity will be necessary for many firms to achieve their long-term goals. While every situation is unique, there are several rules that telecommunications executives should adhere to when evaluating potential deals in current market conditions:

-- Multiple evaluation methods should be applied to potential

deals to ensure both financial and cultural compatibility

-- Both parties should benefit from economies of scope as well as

scale

-- The transaction should enhance or accelerate profitability

-- The transaction should provide immediate, tangible

(quantifiable) benefits

About ATLANTIC-ACM

Boston-based ATLANTIC-ACM (www.atlantic-acm.com) is a leading provider of strategic research and consulting services serving the telecommunications and information industries. The company assists clients in evaluating opportunities for successful investment, market entry and long-term planning.