Do two wrongs make a right?

Group Telecom Inc. (GT) and 360networks Corp. plan to build Canada’s ultimate telecommunications company by joining forces, but customers and industry analysts are giving the consolidation mixed reviews.

Vancouver-based 360, a voice and data service provider known for its wholesale business – or lack thereof – announced last month a plan to acquire GT, a troubled competitive local exchange carrier (CLEC) headquartered in Toronto, for $260.5 million, according to 360. Together the firms expect to make a big splash in the telecom arena.

“360 Group Telecom is the facilities challenger,” said Greg Maffei, 360’s CEO during an interview with Network World Canada. “We are it, the only game in town…the most extensive.”

But there’s no denying that both 360 and GT have faced their share of hurdles in the past, recent obstacles that still could trip up the unified front. For example, 360 was one of the first telecom companies to feel the effects of a “capacity glut,” wherein too many players installed too much fibre-optic cable and competed for too few clients. The situation led to a price war among competitors; 360 was an early casualty of the skirmish.

The firm filed for bankruptcy protection in June 2001 and only this fall unveiled a restructuring plan amenable to creditors and the courts.

Meanwhile, GT, which built 17 metro-area networks to provide countrywide, business-class voice and data service, requested protection from hungry creditors in June 2002. Recently it said the courts had extended that protection to Dec. 11.

Nevertheless, Maffei seemed to think success is in the bag. He mentioned how his firm has expertise in longhaul connectivity and how GT knows all about metro-sized links. Together they would create a comprehensive network destined to support enterprise-grade service.

“There’s the opportunity to use GT to drive our metro traffic,” Maffei said, explaining that 360 could handle inter-city traffic while GT would manage intra-city connections.

“It’s what we call our ‘AB-YZ’ problem. Longhaul players are good at carrying traffic from B to Y, but less experienced carrying you from A to B and Y to Z.”

GT, he explained, knows how to get voice and data traffic between A and B, as well as Y and Z. Put 360 and GT together and you have an alphabet soup that smells good to corporate Canada.

Maffei might be bullish about the future, but others are skeptical. Consider Joe Polard’s opinion. He’s the vice-president and general manager of Accounts Recovery Corp. (ARC), a collection agency headquartered in Victoria. On one hand, Polard said his company was somewhat relieved to hear about 360’s purchase plans. ARC relies on GT for Internet connectivity and was “a little bit” concerned when the service provider dived for creditor protection this summer.

Nonetheless, Polard isn’t willing to say the 360-GT combo is the best idea. After all, GT may serve ARC well, but “doesn’t 360 have its own problems?” he said, voicing a fear that two wrongs do not make a right.

Nick Rallis, director of procurement with Coretec Inc. – a Toronto-based printed circuit board manufacturer and GT client – was positive about the acquisition in his e-mail response to questions from Network World Canada.

“What will [the acquisition] mean for Coretec and other GT customers? Hopefully, the same level of competitively priced services. As well, 360networks may bundle more service offerings, which may further help us reduce our communication-network costs. We will have to see how this new company unfolds.”

Warren Chaisatien, an analyst with IDC Canada Ltd. in Toronto, was less optimistic. He said 360 and GT might find the path to profits blocked by competitive forces.

For one, Chaisatien figures 360’s acquisition suggests the company is moving away from the wholesale market and towards the service provider arena, where it will compete with Bell Canada, its affiliates and Telus Corp.

“I don’t know if that’s a good move,” the analyst said. While acknowledging the wholesale market has not been kind, Chaisatien said 360 risks annoying the incumbents Bell Canada Ltd. and Telus Corp. These 800-pound gorillas in the service provider space might fight back with prices low enough to set 360 off balance.

But Maffei said the shift towards a more “customer-facing” paradigm makes sense. It gives 360 a better chance of surviving than did wholesale, a market saturated with a “higher concentration of players in Canada” that “have already done their work to build out longhaul.”

“The wholesale space has been very hard,” Maffei said, adding that 360-GT would provide the hallowed coast-to-coast connectivity that neither Bell nor Telus offers.

Elroy Jopling, an analyst with Gartner Inc. in Toronto, said the deal could be good for the firms – and particularly good for GT’s customers.

“It’s a ‘thank goodness’ situation,” he said, explaining that GT’s clients were in limbo waiting to find out what the future had in store. “And it’s a good deal for GT, having somebody buying them lock, stock and barrel, rather than buying up assets and closing shops. The employees are probably happy.”

But judging by Maffei’s words, not all of GT’s workers will be jumping for joy.

“There are clearly some redundancies in the S&GA (selling and general administrative expenses) area,” he said.

360 and GT entered a seven-day negotiating agreement the week of Nov. 15. This acquisition is the result of the closed discussions they had during that time. The deal is subject to court and regulatory approval before it’s finalized. In a joint statement, the companies said they expect to wrap things up by Feb. 13, 2003.

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Jim Love, Chief Content Officer, IT World Canada

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