Archive for Tuesday, February 1, 2005

SBC to buy AT&T

$16B acquisition creates speculation about MCI sale

February 1, 2005


— The purchase of AT&T; Corp. by SBC Communications Inc. saves "Ma Bell" from a nosedive into irrelevance in the industry it created more than a century ago. It also gives SBC the name and the network to fulfill its goal of being viewed as a truly national player rather than just a local telephone company.

The $16 billion marriage of long-bitter rivals, which may take until mid-2006 to clear intense regulatory scrutiny, would add long distance and business services to the list of markets where SBC holds a dominant role. It already is the first or second largest U.S. provider of local calling, wireless and Internet services.

The deal announced Monday also sparks immediate speculation as to whether two other largely regional powers, Verizon Communications Inc. and BellSouth Corp., will need to keep pace by purchasing MCI Corp. for its national network infrastructure and roster of corporate clients.

While both SBC and Verizon are by now far larger than Bedminster, N.J.-based AT&T; on many fronts, the business customers served by AT&T; and MCI include far more major corporations with national communications needs. Many of those customers are hesitant to switch providers for a lifeline as vital as communications, making it hard for the Bells to lure away AT&T;'s clients.

For that reason, SBC made clear that the globally recognized AT&T; brand name would not disappear as a result of the deal.

The companies declined, however, to say whether the AT&T; name might be used for specific services or possibly even replace SBC, which formerly stood for Southwestern Bell Communications and therefore carries some nonnational connotations which San Antonio-based SBC has strived to leave in the past.

"We obviously need a few days to figure all this out because this (deal) came together kind of quick," said Edward E. Whitacre Jr., SBC's chairman and chief executive.

"But," he stressed, "It's a great name. It's not going away."

While it's doubtful the valuable AT&T; brand would ever have been abandoned, AT&T; the company has been rapidly decaying as a viable business for five years, battered by multiple financial traumas.

First came an overpriced binge of acquisitions in the cable TV industry designed to give AT&T; its own direct wire into the homes of consumers for the first time since it was forced to spin off its local phone lines in 1984, creating Southwestern Bell and six other "Baby Bells."

Then came the collapse of the technology bubble and its briefly insatiable demand for telecommunications services; criticism over its inability to match the fraudulent numbers being reported by WorldCom (now MCI); and regulatory changes that will end AT&T;'s ability to lease local Bell lines at low government-set rates.

AT&T;'s revenues have been on a steady slide, from nearly $50 billion in 1999 to $30.5 billion in 2004. Its residential customer base has fallen from a peak of 60 million to about 24 million at the end of last year. In their quarterly update two weeks ago, AT&T; executives declined to suggest either trend might end any time soon.

The agreement calls for each share of AT&T; to be purchased for SBC stock worth $18.52 at Monday's price, plus a cash payment of $1.30, for a total value of $19.81 per share.

That represents little premium over AT&T;'s share price, which rose sharply last week amid reports a deal with SBC was being discussed. In Monday's trading, AT&T; shares fell 52 cents, or 2.6 percent, to $19.19 on the New York Stock Exchange. SBC's shares rose 14 cents to $23.76 on the NYSE.

In addition to the jump in long-distance and business customers, the deal would leapfrog SBC past Verizon in terms of revenue. Combined, SBC and AT&T; would have had $90.6 billion in revenues in 2004, including SBC's proportionate 60 percent share of the Cingular Wireless venture it owns with BellSouth Corp. Verizon's revenues, including its proportionate 55 percent share of the Verizon Wireless partnerhip with Vodafone Group PLC, totaled $58.8 billion in 2004.

The deal likely won't close until mid-2006 due to the unusual number of government regulatory bodies who'll need to weigh in on whether it might hurt competition. The regulatory review is expected to include two federal agencies and at least 26 state agencies.

SBC and AT&T; executives were adamant Monday that the competitive issues which prompted the government to break AT&T; into eight companies in 1984 are no longer relevant in a market which now includes numerous nontraditional competitors including cellular providers, cable companies and Internet-based phone services.

But at least one consumer advocacy group immediately rejected that contention.

"Consumers have only two choices -- a single cable company that dominates video and high-speed Internet or a regional Bell operating company that dominates local, long distance and wireless," said Mark Cooper, director of research for Consumer Federation of America. "Two companies are not enough to provide serious price competition or strong incentives to innovate."

Because SBC and AT&T; must continue to compete as if their merger may not occur, AT&T; indicated it will proceed with plans to launch its own brand of cell phone service this year.

In an interesting twist, the new AT&T; Wireless will compete directly with Cingular Wireless. Cingular recently became the nation's biggest cell phone company with 49.1 million subscribers by acquiring acquired the old AT&T; Wireless, which AT&T; Corp. spun off as an independent company in 2001.

AT&T; doesn't own a wireless network, so it had struck a deal to use Overland Park-based Sprint Corp.'s cellular system. AT&T; executives declined to say whether that deal would stand or whether they might now seek to forge an agreement to use Cingular's network.

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