Why Verizon Stock Dropped Wednesday

Is Verizon Communications (VZ -3.47%) about to open its wallet for a huge new acquisition?

That was the buzz around the stock market Wednesday, and on the potential news that the incumbent telecom could spend a pretty penny on a deal, investors traded their shares. In late-session trading, Verizon’s share price fell nearly 4%, a more dramatic drop than the 0.4% drop in the S&P 500 index on the point.

A potential deal that could easily exceed $10 billion

The Wall Street Journal published an article today stating that Verizon is deep into negotiations to acquire a broadband internet specialist Border communication (VYBR) 39.62%)The financial newspaper wrote, citing anonymous “people familiar with the matter,” that a deal announcement could come as early as this week.

If it were to come to fruition, such an acquisition would be significant. On news of the potential deal, investors surged into Frontier’s stock, pushing its market cap to more than $9.5 billion. That’s expensive, even for a behemoth with sustainably high levels of free cash flow (FCF) like Verizon. The already debt-laden company would almost certainly have to find outside sources of financing, as its cash and short-term investments totaled less than $3.8 billion as of late June.

In considering a Frontier acquisition, it’s likely that Verizon is looking to increase competition in the broadband space. Mobile service isn’t exactly a hot growth area these days, while numerous regions of this country are still underserved by high-speed internet.

Easy integration?

While integrating two large companies is never a quick or easy task, Verizon and Frontier are relatively compatible. The latter’s broadband operation, currently being upgraded from old copper wires to fiber-optic technology, is roughly a companion to Verizon’s Fios network.

Neither Verizon nor Frontier has officially commented on the Magazine article.