Broadview CEO: Operating Leverage Does Matter

Eighteen months after Broadview Networks Inc. completed its merger with BridgeCom, the company announced in June 2006 another transaction — this time an acquisition of ATX Communications Inc. The combined company creates a CLEC operating in the Northeast and Mid-Atlantic states with revenue of around $400 million.

PHONE+ Editor Khali Henderson spoke to Broadview Networks CEO Mike Robinson, who has been in the CLEC industry since 1998 at US LEC and now Broadview, in last August about the two deals and the changing competitive landscape. What follows is an edited transcript of that interview.

What were the motivations for the recent acquisition?

Broadview is the result of a merger that took place in January of 2005, so we are a year-and-a-half into the combination of Broadview Networks with a company called BridgeCom. That took us roughly to a quarter-billion dollars in revenue. That was a footprint throughout the Northeast through the mid-Atlantic and with a dominant portion of that revenue in the downstate New York metro market. The integration was extremely successful and done pretty quickly. We have been stable as the current Broadview for a year or so.

ATX was interesting on several fronts. It continues the strategy of trying to build density within our existing footprint. No. 1, thats kind of a business goal — more density, more customer and market share in network. Certainly, like any deal you hope it grows the top and the bottom line and it does. It takes us from the $250 million range to about $400 million in revenue. It moves us into a much larger carrier than we are today.

In addition to the top- and bottom-line growth, it also is accretive to the company in some other ways. It does bring some additional markets. They are in some markets in the Mid-Atlantic, such as Baltimore and D.C., and Delaware that we are not in. They also bring us a strong position in the Philadelphia metro market not unlike the one we have in New York. So, it gives us kind of two very, very strong markets as well as some very good markets throughout the rest of the footprint.

They also bring to us some products that we are very interested in selling throughout our footprint. They have a mature set of managed services that we think well be able to cross sell through out our existing base and our existing footprint.

It was really accretive in many ways. It really is a combination of companies where we are meeting in the middle and not just in the middle of the footprint, but we are meeting in the middle of customer size of joining products sets. So its good for us no matter what angle we looked at it.

Are your customer targets similar?

We were kind of heading toward each other. ATX historically dealt with slightly larger customers. And, Broadview pre-2006 was probably more down-market. We have successfully gone up-market, pretty substantially, to the point where our T1 and DS1 customer base has grown substantially. In the meantime, ATX has realized there are only so many big, big, customers, so they started looking at the SME world. We were probably heading toward each other in terms of going after a similar target set.

Within the space of two years, you have done two fairly sizable acquisitions. Is your expectation that you will continue on this rollup strategy. If so, whats your goal?

I think our focus is — this is a mantra — is we are going to continue as we have in the past on running the business, running it into profitability and cash flow. Along the way, I think we are going to have — like any other good operator — numerous opportunities to be an acquirer or look at other combinations. In the near term, our focus is more density and more growth where we are likely to be an acquirer either organically or not organically like we have with the Bridgecom deal or with ATX.

However, we have a very attractive asset, I believe, with a decent-sized company of $400 million and having a particularly strong position in two cities in the Northeast and Mid-Atlantic. So, weve got just to put it into perspective, well have about 600,000 lines with ATX. About, 250 colos and 2,300 route miles of fiber. Its a very asset-rich company and a very big portion of the U.S. telecom market. The fact that we have those assets and the particularly strengths in New York and Philly as well as pretty strong positions in upstate New York, New England and the rest of the Mid-Atlantic, we are a pretty unique carrier. We are pretty dense, tightly compacted in that region.

In the near term, we are trying to build organically and non-organically and then I think a lot of opportunities are likely to come our way for other things. We are focused on running the business right now.

How do you think this merger impacts the competitive landscape?

I have been in the CLEC industry for eight years. I spent seven years at US LEC. I have had a chance to watch combinations or attempted combinations in our sector. During the first part of the CLEC industry, in my opinion, were not done for the right reasons. Now, the smart ones that are being done today are being done for more right reasons. By that I mean its accretive in terms of cost savings; its bringing a broader product set to the market. Its really rationalizing a lot of the models of the survivors and the people who are prospering now as facilities-based CLECs.

If you start with the presumption that the deals today largely make sense, then it comes down to how well you execute on the integration of two companies. I am sure you have seen some that were done really well and the companies look better together and some that maybe havent done as well.

We, fortunately, have a track record and experience putting Broadview and Bridgecom together quickly and with limited impact to the company, so you get back to running the business. We anticipate being able to do that with ATX at least as fast, or faster, than we did with Bridgecom. Weve got a core competency in being able to do integration within the business operations.

Is there something that makes integration easier for you?

A lot of the companies that dont get integrated well because the new management team doesnt have the commitment to follow through. Its not easy. Its easy to have on paper and not follow through with systems and processes to put organizations together. So, you wake up and you have two companies that are operating somewhat independently under one name. They are actually worse off than they were before. I think the real reason is one of the biggest reason we thought ATX was a good fit for Broadview. Its a culture built around customer care.

When we met the ATX management team, it was like looking in the mirror. It was a group of people that were focused on running their business and delivering on their commitments to their customers. Whether its our commitment to our customers, our employees, our agents or whomever, our ability to delivery to on our promises during integration is going to be one of the differentiators as we and other people continue to consolidate in this sector.

How do you thing the consolidation among CLECs will impact the competitive landscape in general?

I think we as an industry still compete against the same competitor we have always had –whether they have merged or not. The basis for continued combinations of CLECs in a region like the Northeast, if the deal makes sense, I think you will see more of them continue to happen.

There is a period of digesting that will take place soon. Putting two companies together takes a lot longer than the process of negotiating a deal, especially when you want to do it right.

I am wondering about size as a driver for any of the CLEC mergers? Is $1 billion a magic number?

I think its very important. Its important in the context of relative scale. A certain subset of your network costs and SG&A is somewhat fixed. Whether its our company at $400 million, a piece of it is going to be here whether we add 1,000 lines or 20,000 lines. Certainly, absorbing the fixed cost of your infrastructure, basically creating operating leverage is always going to be enhanced if you get to spread more volume over fixed costs.

Also, most people are in the process of rolling out next-generation products, to the extent you can spread the cost over a bigger base; there are always savings there too.

If we were looking out five years, what will the CLEC market look like? Are we going to see half a dozen really big CLECs?

It depends to a degree what peoples objectives are. One of them is to provide a return and in some cases exit for investors. There has to be a plan for how you are going to do when you grow up, right?

The bigger the company gets, on the one hand, [you] can go public or keep buying but you limit your ability to be bought because at some point, you limit the number of people can buy a billion-dollar company. So, it starts with what the near-term or mid-term objective is. If you were trying to get bought, you probably dont want to get up to $2 billion because there are only a couple people who could swallow you at that point.

Over the last two or three years, youve seen a few approach a billion. It puts them in a different position than when everyone was in the $100 million to $200 million range.

Will there be room for $100 million companies?

I think in any industry there is always room for niche competitors. But at a high level its a business that does depend to some degree on scale. Operating leverage does matter as the price point per unit — whether its per-minute or per T1 or per line — comes down to being able to be competitive and drive costs down with it, so that you maintain a level of profitability, and, I think investment. To invest in new technologies, new sales forces to open up new markets, you need to have a certain mass.

I would never discount somebody because they are small, but I think in large part you are going to need more scale than the smaller guys are going to have and I think thats probably good. A lot of them are going to look for a logical partner. I dont think they have to race out and marry somebody tomorrow. I think you will see the ones that have held out for a while start looking around and trying to sort out the optimum partnership for them — the one that makes the most sense.