Birch Communication announced it is purchasing Cbeyond today, April21, 2014, for $323 million in cash.  It's an interesting deal, but you haven't heard the last of Birch or Voice over IP (VoIP) mergers and acquisitions.  

Frankly, Birch hadn't been on my radar. Paying $323 million in cash for Cbeyond just set off the alarm bells.  It's hard for stockholders of any stripe to turn down cash, especially when it comes as a premium of nearly 41 percent over the closing price of Cbeyond's stock on April 17, 2014. The deal also indicates Birch has the ability to work out a financing deal with Wall Street to get the cash.

Cbeyond is the 21st acquisition privately-held Birch has made in recent years.  Birch says the acquisition creates a nationwide communications, cloud, and managed services provider with around $700 million in annual revenues and a whopping 200,000 business customers located in all 50 states, the District of Columba, Canada and Puerto Rico.  It also creates a nationwide IP-based network with approximately 10,000 fiber route miles, over 500 fiber-lit buildings, 570 collocations and 5 data centers.

To put Birch's business in perspective, Cox Business generated about $1.6 billion in 2013 and is on a run rate to reach $2 billion by 2016. Internationally expanding and acquisition-minded 8x8 had revenues around $108 million in its FY2013 year.  

I think it's fair to call Atlanta-based Birch a mid-sized player in the business VoIP space, but will it grow larger through further acquisitions? Or will a larger player such as a CenturyLink, Frontier, or Windstream make a play?

Cbeyond had effectively put itself on the market last November by saying it was reviewing its "strategic alternatives."  I predicted Cbeyond would be purchased earlier this month, but I admit I thought that a Tier 1 phone company or a cable company would snap them up.   Upon further review, I realize the cable companies are dedicated to organic growth within their own geographic service areas while a Tier 1 phone company such as AT&T or Verizon seems to be incapable of buying anything under a billion dollars.

The irony of AT&T/Verizon M&A strategy is that those companies end up having to "buy large" because they don't have the corporate culture to understand or integrate smaller companies.   Compare them to Facebook or Google, who both have the "buy small and grow bigger" formula down pat.   Internet service companies are not afraid to make smaller purchases and understand such transactions can provide strategic benefits, such as Google's support and ultimate purchase of Android Inc.

Maybe AT&T and Verizon need to start "thinking small" if they hope to recapture market share in the SMB space.