Kevin O'Hara, Level 3's president and chief operating officer, acknowledged that approach on the conference call announcing the acquisition.

“We will be migrating all customer traffic onto one network and eliminating duplicative backbone costs,” he said.

That's probably good news for the wholesale business in general, Washburn said. “This is actually good for Global Crossing and for XO because it means there are fewer competitors,” he said. That means fewer options for enterprise customers who want diversity among network operators, Washburn added.

“You have CLECs like Yipes and Cogent and those kind of carriers that can buy wholesale from a Level 3 or whomever they choose to have as a backbone provider and still be very effective in the market,” he said. “And Level 3 can't corner this market — wholesale will continue to be competitive, and as long as that is the case, prices will continue to be driven down.”

“This consolidates the market a little, from eight to seven players, but seven players does not make a cozy oligopoly,” Jaegers said. “Qwest, Global Crossing, XO and Savvis — those four players are still subscale and still need to do something else. You will see more combinations. Prices will still be coming down — it's just that instead of coming down 30%, they may only come down 20%.”

XO and Global Crossing were both rumored to be bidders for Broadwing, and Level 3 CEO Jim Crowe acknowledged that his company had won a competitive bidding process. Jaegers believes XO is still ripe for takeover. The company issued a press release on the same day as the Level 3/Broadwing announcement, saying it was no longer looking to sell its national backbone network.

Just before the Level 3 sale was announced, Jaegers had downgraded Broadwing from a buy to an accumulate because she expects its quarterly results to “come in a little soft” in the face of new price competition.

“Pricing wasn't as disciplined as everyone was portraying it,” she said. “This is a commodity market. Pricing isn't as cutthroat as last year, but after some firmness, it sounds like people might be getting desperate again.”

Rather than use its cash on hand to get bigger, Broadwing chose to sell at $15.22 a share. An XO/Broadwing combination, rumored recently, could well have fallen short of getting the financing required. “If you know you can't get the financing together to get bigger, then it may be smarter to sell,” Jaegers said.

Broadwing brings significant assets to Level 3, chief among them its enterprise customers and a national sales team experienced in addressing that market. Half of Broadwing's more than $900 million in annual revenue is enterprise, said Sunit Patel, Level 3 chief financial officer.

In addition, Level 3 expects to achieve $200 million in cost synergies, mostly from a reduction in network expenses as it migrates traffic onto a single backbone and also can migrate Broadwing's local traffic onto Level 3's metro networks. O'Hara said Level 3 expects to continue Broadwing's 4% to 5% growth while roughly doubling its gross margins to Level 3's current 60% to 65% after the merger integration is complete.

Level 3, which integrated WilTel “ahead of time and under budget,” according to O'Hara, expects to close the Broadwing sale in the first quarter of 2007 and complete integration within 18 months. Crowe even hinted to analysts that the buying spree may be at an end.

“Right now, our appetite [for future purchases] is pretty low, and our hurdle is pretty high,” he told industry analysts. “We realize that more than half of all acquisitions destroy value for the acquiring company. We have demonstrated concern about any acquisition, and we have worked very hard not to ever forget that not only is it important to buy at a fair price but to have all the questions you can answered before you sign. We are not going to forget that, and we are going to continue to have a high hurdle.”

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LEVEL 3'S SPENDING SPREE