The Endgame at AFC: Acquiring Marconi's Access Business

Well, in the middle of the FiOS execution we added more onto our plates with our acquisition of Marconi's North American Access Business. This was the real catalyst that kicked off the M&A cycle, although most people think it was FiOS. The reason is that nobody believed in FTTH in North America. People could see the revenue from Marconi and suddenly AFC went from a company with $20M in Tier 1 revenue to $200M in Tier 1 revenue annually.

Marconi was in real trouble. Unlike most of their counterparts, Marconi had paid cash for its bubble era acquisitions. The organization was on the brink of receivership. Their plan was pretty simple, dump divisions for cash. They would then use the cash to pay down their debt load. In 2001, Marconi corporate had already announced that they were pulling out of the Access Business in North America. I have already blogged that this immediately lost the division a lot of business with Sprint LTD (now part of Centurylink). What they did retain is a large relationship with BellSouth. BellSouth had a lot of new homes being built in high density subdivisions and used FTTC to reach those new homes. No other company in the US or even globally had that commitment to FTTC. This meant that the Marconi product was unique and no competitors had a similar product. BellSouth also deployed the Marconi DLC and Alcatel's Litespan in other areas. They also deployed the Catena system to upgrade their SLC-5 base to DSL. They even had a small base of AFC product which was an unhappy piece of business for both companies.

Marconi pushed the marketing of the division in early 2003 and AFC did its due diligence. The division had negative gross margins at the time and because of this we were not very interested. We put in a minimal bid and forgot about things. FiOS was heating up in the fall. Their bankers called us back in the Fall telling us that parties were now beginning to enter real bids. We took a look and their gross margin had finally turned positive. It wasn't great, but at least we could see our way to net positive business. Given our 2001 Business Plan, here was an opportunity to "buy" a significant chunk of Tier 1 market share. Given the amount of cash we had, this seemed like a no brainer investment.

The bidding heated up considerably. We were in a bidding war with the Alcatel group. We did 3 rounds of bidding and arrived at a price of $240M. This allowed us to go exclusive and truly begin negotiating a deal. And that deal was a nightmare to complete. There were lots of reasons and I will provide a lot more information about my issues, but just to start things off AFC had sued Marconi for $1B. The lawsuit was settled in 2000 but many of the attorneys on both sides were still in place. This meant that trust levels were non-existent and making progress was dificult.

I was in charge of Intellectual Property (IP) issues for our side. This was to be an asset sale, which means that the IP is actually what your are buying. The biggest problem was that the IP became co-mingled with other divisions. This included an International Access Division that would need a license back on all the IP that AFC bought. Yes, that's right. Our purchase price had to include a free license on everything we just bought. My resolution to this was a non-compete in BellSouth for 5 years for Access products. I reasoned that by then there would be enough work on the IP that we would have diverged to a point that if Marconi showed back up it would be with something different.

There were a litany of issues like that and that was not the only one that I had to deal with. From the lack of Lease on the building to issues of Fraudulent Conveyance to the Contract for cabinets, this was a long and hard negotiation. We spent weeks working on it full time. Keith Pratt, Amy Paul, Jeff Rosen, and I were the primary players. We announced the deal on Monday 1/4/04 and I was on a conference call the night before until 2:30AM. The deal was announced while papers were still being faxed for signatures. Other than the deal closure, you have to realize that the 4 of us were out of other corporate work from Halloween until the first of the New Year. Keith even missed a visit from his parents from Ireland. The stress and load added was tremendous. And the FiOS issues were still festering.


Jim Sackman
FocalPoint Business Coaching
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