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Mergers & acquisitions

Covad/MegaPath Will Keep Buying

The merger between Covad Communications Inc. and MegaPath Inc. , announced Wednesday, is only the first of what will be more acquisitions, according to D. Craig Young, CEO of MegaPath and the executive chairman of the new company. (See Covad, MegaPath to Merge).

The expectation is that the merged company will use the cash generated by growth and by operational synergies to continue to expand, both organically and by acquisition. The next deal could come later this year, Young tells Light Reading.

"We do expect more consolidation in the competitive carrier industry, and we will be one of the consolidators," he says.

The combination will be a boon to both Covad's wholesale business and MegaPath's managed services sales, Young notes. The MegaPath managed services portfolio, including hosted VoIP, managed security services, and MPLS-based virtual private networks, will be made available on a wholesale basis to Covad's customers, while Covad's nationwide footprint will provide a broader and more cost-effective base for managed services sales.

"Overlaying all of our managed services -- MPLS VPNs, our SSL [Secure Sockets Layer] and managed security offerings, and our private banking platform -- over their network will give both our wholesale and retail customers a lot more products from which to choose," Young says. "This will enable us to grow the business on both sides."

Covad has the largest facilities-based competitive network in the US, with equipment in 4,400 central offices nationally, while MegaPath operates out of 250 COs. In places where the facilities overlap, they will be combined to save costs, according to Young.

Both companies are owned by private investors, and so they aren't releasing the terms of the deal. Young says the new company will have its own identity, and won't tilt too heavily in either the Covad or MegaPath direction. He adds that the new company would keep the wholesale and retail operations separate, to assuage wholesale customers' concerns about the new retail competition.

"There will be a firewall in between them, and we will absolutely cater to each side so the services are equal, and there is not one side that is better than the other. We will also make sure there are no pricing issues. If you can manage price and you can manage service and product offerings, then there is much less likely to be conflict."

The new company will be rolling out a 3-Mbit/s service shortly, in part to compete more effectively with cable companies at the lower end of the market, and is looking to expand its managed security services portfolio as well, Young says.

— Carol Wilson, Chief Editor, Events, Light Reading

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