
CenturyLink to Buy Level 3 for $34B - waqasaday
https://www.bloomberg.com/news/articles/2016-10-31/centurylink-agrees-to-buy-level-3-for-34-billion-in-cash-stock
======
kyledrake
IP transit is probably cheaper if you own the IP transit company. Conceptually
this makes sense. Has that Rockefeller vertical integration feel to it.

Take this with a grain of salt, but from what I've gathered doing IP transit
related work, Level3 has something of a reputation of being higher quality
transit than many of their competitors. They tend to cost more and people seem
to be paying it.

~~~
icebraining
_Has that Rockefeller vertical integration feel to it._

Yeah, with the acquisitions they've been making, you can use your home
CenturyLink connection, which goes over the CenturyLink backbone cabling, over
to CenturyLink's IaaS provider, which hosts an app deployed using
CenturyLink's PaaS.

~~~
exelius
CTL is much stronger in the commercial space than they are in residential.
Vertical integration is the name of the game in the commercial telecom space,
and has been for 30+ years.

And really, think of CTL as a decades-long rollup of baby Bells in the north
central / midwestern US and they make more sense -- just like AT&T is largely
a rollup of the southern and western Bells and Verizon is largely a rollup of
east coast Bells.

AT&T and Verizon were able to prevent Comcast from becoming a third national
competitor (for now), but it looks like CenturyLink will just take their
place. Look for them to get into cellular in more than an overbuilding
capacity soon though. I will almost guarantee that Sprint ends up with Comcast
and T-Mobile with CenturyLink -- though I also wouldn't be surprised if the
opposite happens.

Our goal as people who use telecom services should be to get as much diversity
in telecom as possible. Right now, it's a two-horse race: AT&T / Verizon and
Comcast / Charter / Cox. If, in 10 years, we have a choice between AT&T,
Verizon, Comcast and CenturyLink... that will be better.

Small, local competition for ISPs do not make sense over the long term. It may
get you fast speeds over the last mile in the short-term, but doesn't get you
a fast connection to everywhere else and the investment levels are going to be
unable to keep up after the first generation. The oversubscription model
benefits from national scale, and even a national last-mile telecom without a
national fiber network will have problems matching the cost structure of their
competitors (as we recently saw with TimeWarner Cable). The infrastructure
doesn't scale operationally or financially otherwise.

~~~
chrishacken
" If, in 10 years, we have a choice between AT&T, Verizon, Comcast and
CenturyLink... that will be better."

CenturyLink is already one of the big players and they'll never enter markets
that Comcast, ATT, or Verizon are already in. We're a small ISP and a Level 3
customer. I'm moderately concerned about what this acquisition will mean for
companies like us in the long run. The hand that feeds us is now also a
competitor.

~~~
CaptSpify
> CenturyLink is already one of the big players and they'll never enter
> markets that Comcast, ATT, or Verizon are already in.

They are entering Comcast's market in Seattle. A lot of places now have two
options, where they only had one ~3 years ago.

~~~
at-fates-hands
They've been competing with Comcast in my area. I was lucky before I moved, I
was about 30 yards from the DSLAM and was getting solid internet service from
them for about $25 less per month than Comcast.

Then I moved to an area they're not servicing very well. My internet speeds
went from 60mbs down and 7mbs up to a paltry 4mbs up and 1mbs down.

I had to switch to Comcast which wasn't so bad, but I got way better service
from CL tbh. I've been told they're building out fiber in my area and their
1gb service will be available "soon".

------
mgbmtl
Interesting paper on the falling pricing of transit (2010) :
[http://drpeering.net/white-papers/Internet-Transit-
Pricing-H...](http://drpeering.net/white-papers/Internet-Transit-Pricing-
Historical-And-Projected.php)

On the other hand, I understand transit is a commodity, but not sure I want to
see what happens when a "too big to fail" company goes under, in countries
that have heavily-privatized backbones.

~~~
dsr_
Fiber links are valuable long-term assets, and remaining competitors will
generally be happy to buy them from a distressed company.

~~~
neurotixz
Happened here in Canada with Teleglobe. All their assets (mainly buried fiber
links) were purchased for cheap by Tata Communication, which has been growing
since.

------
ChuckMcM
Interesting, CL has such terrible customer service, perhaps Level 3 was
treating customers too well and Century Link thinks they can help them with
that :-)

It is interesting that CL seems to be operating out of the old MCI playbook.
Here I thought the days of aggregating a bunch of ISPs into a mega
communication company were behind us.

~~~
brightsize
>CL has such terrible customer service

I can vouch for this. We have a choice between CL and Comcast here for
residential service and I've used both. CL has a pretty solid DSL service but
$deity help you if you ever need to call in for some problem you're having
with it. Expect to spend multiple-hours on the phone while you're put on hold
for extended periods, have your call dropped, get routed to numbers that don't
answer, and, if you're lucky, speak to a person who has no idea what you're
talking about but might know someone who can help, "let me transfer you"...
Rinse and repeat. The only good that I can say about CL is that their come-
out-to-your-house techs seem to know more or less what they're doing and have
solved DSL and analog line problems for me quickly and without additional
pain.

~~~
ChuckMcM
Hey, they sent my account to collections twice _after it was already closed_
for "non payment" even though it had a balance of zero. After the second
conference call with the debt collector, the Century link accounts people and
me to unwedge that mess I explained that if Century link did this a third time
I would sue them in small claims court for the maximum amount allowed for
harassment and punitive damages.

------
foepys
How can a company that is valued at $16.6 billion with $19 billion in debt buy
a company that is valued at $19.4 billion with $11 billion in debt for $34
billion? From where is the money for such acquisitions coming?

~~~
caminante
I think you're confused about "value."

CTL isn't valued at $16B. That's only the market capitalization of its common
shares outstanding.

    
    
      LVLT market cap = $19.4B
      LVLT assets = $24.1B (as of FYE15)
    
      CTL market cap = $16.5B
      CTL assets = $47.6B (as of FYE15)
    

This deal's ~$10B cash + ~$15B stock (edit: based on diff. article from wsj[0]
It's $34B if you include $10B in LT debt.) CTL needs to raise cash and
issue/buy-back shares. Lots of options, but I'm sure they already have
creditors lined up.

On an unrelated note, CTL has $20B in goodwill on its balance sheet. Wow...

edit: [0] [http://on.wsj.com/2f0DDdj](http://on.wsj.com/2f0DDdj)

~~~
grosbisou
I never quite understood how goodwill is calculated. I mean, I can understand
how ATVI (Activision) or HAS (Hasbro) can have big "goodwill". But it doesn't
make sense for CTL. Do you have any explanation?

~~~
dkrich
It's BS assets that companies use to add phantom value to a balance sheet with
things like "brand value" and "intellectual capital". There's no way to assess
an actual value, so a lot of companies give outlandish valuations to
themselves to make themselves appear more valuable than they are. Some people
will disagree with that, but that's the reality.

There are of course a lot of companies that have extremely valuable brands and
IP, but those tend to trade at pretty fair market valuations and don't have an
unusually high percentage of goodwill relative to the rest of their assets.

In the case of CenturyLink, that would be a major red flag to me.

~~~
samfisher83
Goodwill is just accounting. It is your what you pay - net assets whats on
their balance sheets. No real BS about that.

~~~
dkrich
Right, but just because an accounting team says "Well yeah the market values
the company at $5B, but we think it's worth $15B because goodwill" does not
make it so.

In some cases, there is additional value created by an acquisition that can
justify that added value, but in many cases it's just a way to justify an
irrational overvaluation on a balance sheet.

For example, the last time I looked CTL had lost about $2 billion in market
cap after this deal was announced. That's the market saying "you overpaid for
this company" or, as I prefer to say "your goodwill valuation is BS."

~~~
kgwgk
It doesn't work like that. You're not paying $15bn for some assets worth $5bn
because you have decided that the "goodwill" is $10bn. It's the other way
around: you have decided to pay $15bn and as a result you write down in your
books tangible and intangible assets for $5bn and "goodwill" (the balance) for
$10bn. Maybe you think it's better to write off the $10bn as wasted money
right away, but that also creates some issues (for example, you would probably
wipe off your profits for several years, so you wouldn't have to pay taxes).

~~~
dkrich
Goodwill is the amount you paid beyond the tangible assets (cash, property,
equipment, accounts paid, etc.) on the balance sheet. You can call it what you
like, but basically it's something you spent cash on that you have to show on
a balance sheet but has no tangible value. This is usually attributed as
"synergies", "IP", "brand recognition" and other BS.

~~~
kgwgk
> Goodwill is the amount you paid beyond the tangible assets

Wrong. For example "Hewlett-Packard purchased Autonomy for $11 billion in
2011. The purchase price represented a greater than 65 percent premium over
the price at which Autonomy was trading at the time of the announcement.
Hewlett-Packard recorded $6.9 billion of goodwill and $4.3 billion of other
intangible assets in connection with the acquisition."

~~~
dkrich
Ha and how'd that work for them? According to the Wikipedia entry, "within a
year HP had written off $8.8 billion of the value."

Thanks for helping me make my point.

~~~
kgwgk
You're welcome. Just to be clear, I agree that paying too much when making
acquisitions is not a good business model. But goodwill is not the reason for
overpaying, or an excuse for overpaying. Goodwill is the _consequence_ of
overpaying.

------
okket
IP transit seems to be a declining business as content moves towards
customers. See "The death of transit?":

[https://blog.apnic.net/2016/10/28/the-death-of-
transit/](https://blog.apnic.net/2016/10/28/the-death-of-transit/)

~~~
betaby
Not really, because mobile data roaming is growing, and in most cases it
doesn't use local breakout. VoIP is growing in the volume (but almost not
growing in $). That data has to be moved over backbones. Messengers are
growing - again backbone traffic. In fact Tier-1 traffic grows. Revenues - not
so much, price per megabit is in constant fall.

------
Roritharr
I always wonder how companies like this get founded. So i checked their own
history page which includes this statement which reads so dry, i have to blow
the sand out of my eyes by the bucket:

"Our business started as part of a subsidiary of a construction company that
created one of the first competitive local exchange carriers, MFS
Communications."

If you follow that trail of companies, you feel like you've hit "deep
corporate america" where nothing has a founder and everything is a subsidiary
of some larger corporate division of something.

~~~
chimeracoder
> If you follow that trail of companies, you feel like you've hit "deep
> corporate america" where nothing has a founder and everything is a
> subsidiary of some larger corporate division of something.

A corporation is literally just a group of people acting together. Much as the
tech world likes to maintain the image of the visionary individual put forth
by the ideology of creativity, that's of actually how the world usually works.

Most innovation happens when groups of people leverage their existing
collective abilities together well.

~~~
kerbalspacepro
A corporation is a collection of assets owned by stockholders.

~~~
chirau
Someone has been reading Bhandari and Weiss' "Corporate Bankruptcy'. This view
ignores a very important aspect of who/what carries the liability of say
violations made by the corporation.

~~~
djsumdog
What do you think about the book Debt: The First 5,000 Years?

~~~
chirau
With regard to what specifically? I think it's a great book, it touches on
several subjects so you might have to ask more specifically.

------
bogomipz
The article mentions this interesting detail:

"The deal also promises to help CenturyLink by giving it access to about $10
billion in tax credits that Level 3 is carrying on its books, Jennifer
Fritzsche, an analyst with Wells Fargo Securities LLC, said last week."

Can anyone comment/speculate on why L3 has $10 billion in tax credits that is
"carrying"?

~~~
charlesdm
So that's 35% of $10bn right there, paid for by the US government. You've got
to love financial engineering sometimes.

------
jessedhillon
_The acquisition values Level 3 at $66.50 a share, the companies said in a
statement Monday. That’s about 42 percent above where the Broomfield,
Colorado-based company was trading last week, before reports surfaced of a
potential acquisition by CenturyLink..._

What explains this? I could understand a small jump in value, but what can be
the basis for a $14B gain in a company's value when the only facts that have
changed are that a buyer exists? Does the market "believe" that the company's
future 42% brighter under the prospect of a buyout, and that belief is
captured in the price now?

~~~
jacques_chester
My understanding, which should not be relied on, is that the market is
composed of traders expecting other traders to bid it up in anticipation of
CenturyLink bidding it up, so they're bidding it up.

~~~
pandemicsyn
Or that another suitor will step in and cause an intense bidding war ala
Isilon/Data Domain/etc.

------
mdip
I was an employee for Level 3, coming from the Global Crossing acquisition,
for around 17 years, choosing to leave early last year (and unlike most former
Level 3/Global Crossing employees, this choice was not forced upon me).

Internally (and by, internally, I mean within my team, not within management
or anyone who makes decisions of this nature), we'd always seen CenturyLink as
an interesting prospect for merger. The two companies' footprints and
businesses appeared to compliment each other. It was generally dismissed out
of hand because of the consumer side of CentryLink. Level 3 (and even less so
with Global Crossing), focused on carriers and Fortune 50-100 businesses as
their core and shied away from the more expensive, less profitable consumer
facing pieces.

A bit of history for those who weren't around in the 90s: When thinking
CenturyLink, think Qwest (and commercials about the little motel in the desert
with "Cable TV" replaced by media services delivering every television show
and movie produced in the history of ever). They were one of the formerly
local telecoms that expanded into long distance/fiber/internet after the 1996
telecom deregulation[0].

Level 3's business is Carrier and Enterprise with much of the Enterprise piece
coming from the Global Crossing side of it because, at the time, we
effectively couldn't compete with Level 3. We'd come in to bid a project at a
price we could eek out a small profit on and would be undercut because they
owned far more local which had the effect of lower cost of access and lower
complexity for the company we were selling to. Our focus was Enterprise where
the margins were higher, we could work with other carriers to provide the
services (often Level 3) and step in with a better understanding (and
willingness to "do practically anything" to win the contract -- our CEO, after
all, was John Legere and the way he runs T-Mobile came from the way he ran
Global Crossing: "Hug the Customer" was a mantra).

Level 3 (like all telecoms) is a run to the bottom as far as price is
concerned. Cost of access is pretty much _it_ in this business. The expense is
so large it eclipses pretty much everything else. Being able to move more
things onto your own network reduces that expense (and in-turn results in
revenue from others paying _you_ for access to those local components). This
fits well with CenturyLink.

The rumblings of this deal internally were strong over the last few months (I
don't work there any longer and _I_ heard the rumors[1]). Since this had come
up from time to time, I wasn't surprised to hear it again and it still came
with the difficulty of figuring out how a deal like that would work.
Internally, most employees assumed it'd be a Level 3 purchase of CenturyLink,
but a look at the fundamentals of the two businesses made something like that
wishful thinking on the part of employees who are really tired of all of the
layoffs and really didn't want to see a large one that would come as a result
of being purchased.

This will be an interesting transition for the employees of Level 3 proper.
They're used to doing the buying and they're actually _more_ used to being the
company that comes in, strips the company they purchased (of staff) and
imposing the "Level 3 way" on the purchased entity. It was clear that was
their position during the Global Crossing merger and morale became greatly
affected when some Global Crossing employees took leadership positions and
imposed "The Global Crossing way" on Level 3. This resulted in a pretty
dramatic culture clash that wasn't really resolved even by the time I left
(which was shortly after the TW Telecom merger!). At least at that point they
were _still_ suffering getting the various pieces/parts of the company
together and operating as a single, well oiled, machine. Adding this to the
mix will further complicate those efforts. Level 3 was known for being good at
making a purchase and bad at integrating that purchase. I think they did a
better job with the Global Crossing and TW acquisitions, but "better" was in
comparison to the "abysmal" job they did with the six that were there prior.
They still have a history (and current?) reputation of shedding jobs about
every 6 months (5-10% across the board) that despite having a better few
years, didn't change after I left[3]. They have difficulties hiring top talent
as a result, though I'm sure this problem exists across telecom unless you're
one of the two big guys.

Apologies for the lengthy and poorly revised post. The speculation contained
within is my own and has not been influenced by internal employees -- and may
be wildly off since I haven't been an employee there for well over a year, but
I thought I'd share in case it spurs further discussion that irons out some of
the wrinkles. This will be an interesting change in the landscape of telecom,
putting a really large competitor against some of the "bigs" who's reputation
is best summed up by this SNL sketch:
[https://www.youtube.com/watch?v=CHgUN_95UAw](https://www.youtube.com/watch?v=CHgUN_95UAw)

[0] Which is in and of itself a terrible description. It was less a
"deregulation" than a "re-regulation" and like all government regulations of
this kind, it defined a set of "winning and losing business strategies" in
this sector that were different than the strategies that existed before. And a
set of tricks/arbitrages that would create entirely new businesses designed to
provide nearly free services by leveraging cost of access (in a quasi tariff
style).

[1] Before I get anyone in trouble, the rumors I heard were not from people
who would have been in any position to know about something like this and were
little more than the speculation of previous years ... along the lines of
"wouldn't it be great?". I was able to connect the dots, though, by
discovering that certain of my former coworkers were unusually busy -- so busy
that I couldn't get in touch with them due to their workload. Knowing what
they were often involved in, and combining the increase in talk about
CenturyLink led me to fully believe this deal was going to land at some point.
As a result, I didn't do any stock transactions to avoid the appearance of
having "insider information" that I didn't reliably or accurately have.

[2] A look at the fundamentals of both business indicated that as wishful
thinking. It was clear to me if there was going to be a purchase, it was Level
3 who was getting bought.

[3] This was a small bit of my motivation for leaving. I'd been through 30-35
"Reductions in Force" and came out still employed and had continued to have
the confidence of management up to the VP level, so I was not concerned about
losing my job, but all of those "RIF"s take a toll on you. I'm still amazed,
to this day, how efficiently our process for laying off employees had become.
We had entire systems/applications built for the task and it was these sorts
of things. That sort of thing bleeds into the culture of the company and it
was a culture I had grown very tired from.

------
acaloiar
Major communications mergers like this and AT&T/Time Warner read like a
chapter from Tim Wu's "The Master Switch". The path forward for these new
communication conglomerates is either profound failure a la AOL/Time Warner,
or a change in the Net Neutrality legislation that has traditionally precluded
their success.

~~~
rayiner
I'm not sure if I got the same thing out of Master Switch. Clearly the hero of
that book was Theodore Vail and AT&T as the enlightened monopoly.

------
crb002
Prisms for wave division multiplex keep on getting more color channels while
speed of light stays the same. What is the physical limit of prisms?

~~~
crispyambulance
The prisms aren't the limiting factor. The limiting factor is the fact that
the optical signal for any given channel will "widen" in bandwidth when you
modulate it. Some modulation schemes are better than others and you can do
some tricks like using orthogonal polarizations.

At the end of the day, if you modulate a signal at higher and higher rates, it
takes more and more bandwidth. That's your real limiting factor.

~~~
mmmBacon
Sort of. We are able to shape these spectra now to improve the spectral
efficiency (when using colorless muxing). The next generation of coherent
modems will have a 25G granularity and SW will tune the modem to maximize
capacity for a given reach. Higher order modulation requires more SNR so this
is the real limitation.

For relatively short reaches the modulation order will increase. This improves
the spectral efficiency. For longer reaches lower order modulation will be
needed but the baud rate can increase. We can can however use other wavelength
bands like L band to double the capacity. You are already seeing this in new
submarine cables.

------
josh_carterPDX
CenturyLink has been quietly making great acquisition moves for the past few
years. My opinion is this helps move them to be a bigger player in the market.
Now they can further compete with companies like Verizon for more business
market share.

------
amelius
Telecom is a commodity market, so a race to the bottom is inevitable, unless
there is a monopoly (or quasi monopoly) involved.

------
csours
EDIT: Disregard this comment

Leaving my mistake for context.

\---

L3 is also a defense contractor. I wonder what happens when a company is
purchased for one line of business, but is under contract on other, very
different, lines of business.

~~~
alfalfasprout
No, you're thinking of L3 Communications. Totally different companies. Level 3
is a backbone provider, L3 specializes in military communications technology.

------
patrickg_zill
In addition to the tax benefits someone mentioned, Level 3 has massive voip
and traditional voice assets. They are a huge wholesaler to other voip
companies.

------
yeukhon
Wow, CTL already go Tier3 right? They now got Level 3. They pretty much have
half of the telenetwork industry in the U.S., correct?

~~~
jmcqk6
Tier3 was an IaaS. You are not correct.

------
walrus01
[http://fuckinglevel3.com/](http://fuckinglevel3.com/)

------
starcaller
34B is the kind of money I can only dream of. Hell, I don't think I can even
afford to dream about it.

