Is Level 3's Global Crossing acquisition enough to reverse its revenue fortunes?

Sean Buckley, FierceTelecomLevel 3 (Nasdaq: LVLT) made its first large acquisition in a number of years with a $1.9 billion bid for Global Crossing (Nasdaq: GLBC) this week-a deal that gives it greater international reach and services to fight off larger global competitors like AT&T (NYSE: T) and Verizon (NYSE: VZ) that have also been consolidating the telecom service provider market.

From a services and geographic growth perspective, there are three major benefits to Level 3: a broader enterprise services portfolio, Latin American market presence and the expansion of its CDN business.

While wholesale services are, and will continue to be a major piece of Level 3's product mix, when you look at the revenue mix based on the company's 2010 numbers, the combined company's revenues clearly shift toward enterprise services-something that Level 3 maintained has been an increasing focus for them in recent years. According to the 2010 metrics of both companies, the revenue mix will shift to one where Level 3 will have 44 percent of wholesale and then 56 percent of enterprise services.

"One of the most immediate impacts of the deal is the way it shifts Level 3's mix of wholesale and business revenue," said Ed Gubbins, Senior Analyst, New Paradigm Resources Group, in an interview with FierceTelecom, adding that "the combined network assets also give their consolidated sales force much more to sell, which should greatly accelerate their enterprise sales over time as well."

Prior to its merger announcement agreement, Global Crossing already boasted a large set of enterprise services, including data collocation, CDN services, and global IP/VPN services. With a well entrenched domestic metro fiber footprint, Level 3 would be able to sell those services to more multi-site enterprises that have presence in many of Level 3's on-net fiber fed buildings.  

"Level 3's extensive metro presence in the U.S. will not only provide the opportunity to improve the financial profile of Global Crossing's revenue base, but will also make their enterprise offerings more competitive in the marketplace by leveraging a more extensive network footprint," said Jeff Storey, COO of Level 3.

The acquisition will also benefit Level 3 from a geographic reach perspective, especially in Latin America. In Latin America, Global Crossing has a well-established foothold providing not only wholesale carrier services, but also its IP data, colocation and CDN services in the region.

Adding to the mix is greater Content Delivery Network (CDN) capabilities. Already well known for its Vyvx broadcast video platform and related CDN services, it will also add Global Crossing's CDN business that was recently bolstered through its acquisition of Genesis Solutions.

Of course, the acquisition isn't without its concerns. Given Level 3's past history with acquisitions, one of the key concerns is integration.

During Level 3's acquisition spree--a time when it bought out the former assets of Genuity, Telcove, Progress Telecom, Wiltel, and Broadwing's long-distance business--Level 3 went through a challenging integration process-one that it maintains won't be an issue with Global Crossing.

James Crowe, CEO of Level 3, maintained during the conference call announcing the deal that its previous process challenges came with integrating metro facilities.  

"When we acquired and merged with intercity networks (such as) WilTel, Genuity and the long-distance portion of Broadwing, they went very well," he said. "Where we ran into difficulties was the acquisitions of metro assets or local CLECs here in the U.S. We were able to meet our merger model cost targets, but the problem came on the revenue line."  

The other part of the integration challenge is the people challenge. At this point, Level 3 has not revealed the management structure of the new company other than to say that it plans to maintain and expand its existing sales force.

Putting aside the integration and people challenge, the real long-term question is the deal enough to boost both companies' sagging revenues?

Even though Level 3 will be able to likely create a more streamline company, both collectively reported $800 million in losses last year along with declining or flat revenues. Finding a way to apply the Global Crossing assets into a set of growing enterprise business revenues will be the new Level 3's greatest feat yet.--Sean