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Summary:

Level 3 Communications agreed to buy Global Crossing in a transaction worth $3 billion. The deal is a sign of consolidation as broadband becomes the connecting fabric of our lives. But the question isn’t why this deal between two telecommunications backbone providers happened, but why now?

Level 3 Communications has agreed to buy Global Crossing Limited in an all-stock transaction worth $3 billion. The deal, announced Monday, is a sign of the greater consolidation needed as broadband becomes the connecting fabric of our lives (and you thought it was cotton). The question isn’t why this deal between two telecommunications backbone providers happened, but why now?

As Global Crossing CEO John Legere pointed out in the conference call, this is a deal that has been discussed several times in the last few years, but only today came to fruition. The reasons? An increasing need for scale among the global telecommunications players, a changing network topology as well as the incredible rise in video and cloud computing traffic anticipated in the coming years around the world.

But first, the details. The combined network will serve more than 50 countries and provide connections to more than 70 countries in areas including Latin America and Asia, where growth is skyrocketing. Global Crossing shareholders will receive 16 shares of Level 3 common stock for each share of Global Crossing common stock owned at closing. Based on Level 3’s closing stock on Friday, the transaction is valued at $23.04 per Global Crossing share, or approximately $3.0 billion, including the assumption of approximately $1.1 billion of net debt. The transaction will create a company with pro forma combined 2010 revenues of $6.26 billion.

With the metro fiber assets, undersea cable and long-haul fiber crisscrossing the world, this deal allows Level 3 to play with broadband’s big boys, as those boys get bigger. For example, the industry is consolidating in terms of sharing towers for wireless networks, monopoly wireline providers combining and even wireless providers getting bought. As the last mile and wireless providers consolidate, Level 3 needs the power and scale to control its own destiny. For an example of this, check out Renesys’ awesome blog on competition among backbone providers earlier this year.

For example, the spat between Comcast and Level 3 over delivering Netflix traffic in the U.S. takes on a different tenor now if Global Crossing is part of Level 3, making it more difficult for Comcast to argue that blocking Level 3 still allows network traffic to get through on Global Crossing’s network, driving home the concept of last mile providers trying to erect a toll booth on the Internet and how important scale can be for backbone players. Will adding in Global Crossing’s traffic change the math on the peering debate? Likely not, but it could force the FCC to pay closer attention to this issue it seems anxious to avoid.

Scale is important for other reasons as well. As I explained in my story last week about Cisco’s reorganization, the nature of networking is changing, becoming more chaotic and fluid. The multitude of devices, the desire for video streaming and the need for corporate connectivity anywhere on anything have changed networks from being static point-to-point connections to roving connections that pop up unexpectedly on a variety of networks. To adapt to that shift, companies will need to be large and control their own destinies, much like Level 3 and Global Crossing are now trying to do with this tie up.

So for consumers, this deal could change the balance of power away from last-mile providers eager to set tolls on the Internet, while for businesses and investors, the deal heralds a recognition of the changing nature of networking and Level 3’s and Global Crossing’s attempts to bulk up in anticipation of that shift.

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  1. David Ulevitch Monday, April 11, 2011

    Despite being annoyed by this deal as a customer of these networks, I’m looking forward to Level(3) having a presence in Asia again. It’s tough to be a global network when you aren’t actually a global network. :-)

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