SBC-AT&T deal heralds major telco changes

SBC Communications’ acquisition of AT&T, announced Monday, signals a new era for telecommunications, with converged communications services to come from what will be the largest company of its kind in the U.S., said analysts, who sprinkled talk of “history” and “irony” in with forecasts of continued industry consolidation.

The SBC-AT&T deal, along with whatever domino effect occurs, is the leading edge of major changes in telecommunications, with companies surviving by offering a range of services: local calling, long distance, Internet access, wireless and TV.

MCI and Sprint could be in play next, with BellSouth and Verizon Communications possible suitors, several analysts predicted. Network managers also may begin to consider SBC as a possibility for enterprise services, said Bryan Van Dussen, a Yankee Group telecommunications analyst. SBC undoubtedly will become well known globally as well, according to other observers.

Although the $16 billion stock deal isn’t expected to clear all regulatory hurdles and necessary approvals until the first half of next year, analysts predicted that the proposed acquisition will set off a round of merger and acquisition mania in a market ripe for deals. The deal would create a formidable company, combining SBC’s strong domestic and local telecommunications holdings, noteworthy hosted IP (Internet Protocol) communications platform and ambitious VOIP (voice over IP) plans with AT&T’s long-distance, international footprint.

“The irony of a ‘Baby Bell’ acquiring AT&T cannot be overlooked, but there is also a compelling logic at play here,” said Ovum Ltd. research director Mike Cansfield in comments sent by e-mail. “AT&T is a long distance and international company, SBC primarily a domestic and local business. Both are profitable, but having to fight hard in their respective markets. Join the two, cut out the overlaps and drive synergies … and bigger will make better. Clearly SBC has decided — rightly — that size matters.”

SBC and AT&T executives said Monday that the combined company will eventually reach $15 billion in cost savings. The company will be based in San Antonio, Texas, home of SBC. Almost half of the savings will occur from combining IT and networking operations and will be on top of the cost-cutting measures the companies individually have in place, executives said.

The acquisition is akin to a child moving an aged, ailing parent into the house and assuming late-life debt (about $6 billion of AT&T’s net debt will be covered by SBC in this case). A U.S. federal judge in 1984 ordered the end of the AT&T telecommunications monopoly, splitting “Ma Bell” into eight Regional Bell Operating Companies, or “Baby Bells.” The idea was to foster a thriving market for new services though competition and, eventually, a deregulated market.

The Baby Bells were to offer local phone services. It took them years to be able to offer long-distance service, because the Telecommunications Act of 1996 let them enter that market only on certain conditions. One condition was that competitors had to offer local service in Baby Bell home markets. AT&T and SBC became bitter rivals, meeting in courtrooms and regulatory hearings as they attempted to break into each other’s markets.

Baby Bell SBC emerged from the breakup of AT&T with its primary market in Western and Midwestern states and then started to gobble up other Baby Bells in 1997 with the acquisition of Pacific Telesis Group. That deal was followed by Southern New England Telecommunications the following year and Ameritech in 1999.

While SBC has been steadily gaining ground, no one, save perhaps Chairman and Chief Executive Officer (CEO) Edward Whitacre, would have guessed his company was about to buy AT&T when he hinted at big news to come this year during his first-ever keynote talk at the Consumer Electronics Show last month. He will continue in those roles at the merged company, with AT&T chief David Dorman serving as president.

Owning AT&T’s national network — its biggest asset, analysts say — would free SBC from having to negotiate access to that network, though that also effectively kills the era of multiple competitive Baby Bells providing more options to users.

“AT&T, I think, was in a position of rapid disintegration,” said Tom Nolle, president of CIMI Corp., a network consulting and products company. He paints a dire future for MCI and Sprint Corp., neither of whose wireline businesses can survive, in his view. He also suggested that BellSouth will be under increased competitive pressure and that MCI has no hope but to merge with another company, he said.

Independent analyst Jeff Kagan agrees. “With this move, SBC would be elevated above the other Baby Bells with national business services,” he said by e-mail. “It would definitely put MCI on the block, and it would be acquired quickly by one of the other Bells — Verizon or BellSouth or Qwest.”

The acquisition would mean that SBC-AT&T would control 27 percent of local U.S. household subscribers, 37 percent of long-distance household subscribers, and 10 percent of all dollars spent on consumer wireline telecommunications services.

The deal also affects the wireless market, according to analysts, at least in part because AT&T Wireless Services Inc. was bought by Cingular, a joint venture between SBC and BellSouth Corp. If SBC gets its promised landline-mobile convergence together, that boosts Cingular’s value, but if that doesn’t happen, “Cingular doesn’t gain at all from this,” he said. Meanwhile, Verizon will continue to dominate the wireless market, at least for now, TNS Vice President Charles White and other analysts say.

Toss in pressure on cable companies that also are big players in Internet services, such as Comcast Corp., and the competitive landscape in the telecom industry could remain hard to predict for years. “The big question now is gonna be the dynamic between the cable companies versus the telecoms,” Nolle said.

Certainly, many more questions will emerge in the coming months, with some analysts predicting it will take up to 18 months for the deal to get through regulators. Not only must the U.S. Federal Communications Commission and Department of Justice sign off on the deal, but it also has to get through regulators in 26 to 28 states, Whitacre said in a conference call with reporters.

Within hours after the proposed deal was announced, consumer groups weighed in with their disappointment. The deal is a “symbolic reminder” that the U.S. Telecommunications Act of 1996 never led to the level of competition lawmakers promised, said Gene Kimmelman, senior director of public policy and advocacy for Consumers Union. “For most consumers, the communications market is rapidly deteriorating into a duopoly dominated by two firms because of the failure of new entrants to gain a foothold in the market.”

The deal is “very troubling because it demonstrates the complete failure of policy to promote competition in the marketplace and would mark one of the final acts in the long-running reconsolidation of the industry,” he said.

As investors reacted to the news, AT&T’s (ticker symbol: T) share price skidded in afternoon trading on the New York Stock Exchange, selling at $19.04, a dip of 3.39 percent from the opening bell. Investors were treating SBC (ticker symbol: SBC) more kindly, with its shares trading up slightly at $23.84, a 0.93 percent gain from the morning.

Stacy Cowley in New York contributed to this report.