Level 3: 'Size Matters' Isn't Enough
There was a time when you could say of Level 3 Communications Inc. (Nasdaq: LVLT) that it never met a network acquisition it didn't like the look of.
Deal after deal, big, small and in-between, the fiber-rich and IP-infused Level 3 just kept buying other companies and other networks, with its whole corporate strategy seemingly based on another simple maxim: You can never be too big, or have too much bandwidth.
The company was the poster boy for an entire industry's preoccupation with size. Its attempts to win the "mine is bigger than yours" game proved habitual, with its frequent acquisitions making it look like it was always in the network-building business, rather than the business of selling capacity and services.
The price that Level 3 investors have paid for much of that 15-year acquisition binge is ongoing quarterly losses and broken promises that the buying spree and network-building boom would stop someday. The man they had to thank for all that was James Crowe, company co-founder and chief executive for Level 3's entire corporate life until this year. (See Level 3 CEO Sets His Exit).
Even now, Level 3 continues to have financial problems that acquisitions and bandwidth band-aids won't fix. The company once again posted a quarterly loss for the second quarter of 2013, this time amounting to $24 million. That loss was much narrowed from the previous quarter, when it was about $78 million, and from the second quarter of 2012, when it was $62 million. Quarterly revenues remain flat, just shy of $1.6 billion.
But we have seen this movie before, and it often ends with Level 3 adding to its debt, losses and integration agenda by buying another network operator. (See Level 3 Surges on Positive Outlook).
That movie will end differently this time only if Level 3's new management understands that playing the size game won't work anymore. The network is table stakes, but what you compete on is services, price and customer experience. Other comments and indicators from the second-quarter earnings call suggest the new management is beginning to understand that. For example, Level 3's enterprise business is growing and the company even hinted that it doesn't yet need the 100G circuits the rest of the industry is so eager to deploy. New CEO Jeff Storey even said M&A is no longer a priority for Level 3. (I had to have a short lie down after that announcement...)
That sort of restraint isn't common for a company that has spent 15 years trying, without success, to turn size into profit.
Level 3 still has to prove that it has turned over a new strategic leaf, though: If it has really changed its ways, when next faced with a potential acquisition it will say "no deal."
— Dan O'Shea, Managing Editor, Light Reading