AT&T; Will Buy McCaw Cellular for $12.6 Billion

American Telephone & Telegraph, already the world’s largest telephone company, jumped to the top of the booming cellular industry Monday, announcing that it will buy McCaw Cellular in a deal valued at $12.6 billion.

The proposed merger, the fifth-largest in U.S. history, would give AT&T; a firm grasp on virtually every important new information-age technology, and is part of a wide-ranging consolidation shaping up in American telecommunications.

Analysts predicted Monday that the McCaw deal would speed development of new wireless communication services--from pocket phones to hand-held “personal digital assistants”--for consumers who have already made cellular phone service the fastest growing new technology in recent memory.

Based in Kirkland, Wash., McCaw is the nation’s largest provider of wireless phone service and owns half of L.A. Cellular, one of two companies serving metropolitan Los Angeles.

“AT&T; has all the pieces of the puzzle now within its own operations,” said Berge Avazian, of the Yankee Group, a Boston Telecommunications research firm. “And they’re the only company in the nation that has put this together.”

Anne K. Bingaman, who heads the Justice Department’s antitrust division, said on Monday that the AT&T-McCaw; deal was “under investigation,” but would not elaborate on whether the examination was routine or not.

Under the Hart-Scott-Rodino Act, parties seeking to engage in mergers or joint ventures worth $100 million or more must notify the antitrust division and the Federal Trade Commission. The government can approve, negotiate to restructure the deal or sue to block it.

Three years ago, the Justice Department did not challenge a $1.25-billion deal in which the nation’s No. 2 long distance company, MCI Communications Corp., purchased the fourth-largest carrier, Telecom USA Inc., but that was during the George Bush Administration.

Rep. Edward J. Markey (D-Mass.), chairman of the House Subcommittee on telecommunications and finance, called the AT&T; deal “powerful evidence that the future is wireless” but added that he was concerned about a possible return to the telephone industry’s monopolistic past.

“The Justice Department and Congress should review this deal with an arched eyebrow,” he said, “to make certain that the market for long distance, cellular and communications equipment remains competitive, fair and benefits consumers.”

James H. Quello, interim chairman of the Federal Communications Commission, said that although the FCC “must keep an open mind” to any opposition, a merger of the two companies “possesses great future potential for national and global growth.”

Wall Street also reacted favorably, sending cellular stocks upward, but the proposed deal raised immediate objections from the regional Bell operating companies that AT&T; was forced by court order to spin off a decade ago.

McCaw shares soared $5 to close at $56.25 in NASDAQ trading, while AT&T; actually fell $1.625 to $60.75 on the New York Stock Exchange.

“This means the AT&T; of 1993 will look like the AT&T; of 1983, offering long-distance service, manufacturing and a substitute for local phone service,” said Edward E. Whitacre Jr., chairman of Southwestern Bell Corp. “Meanwhile, our customers are disadvantaged.”

The so-called Baby Bells want to be freed of many of the regulatory restrictions imposed on them in the Bell system break up, including the prohibition against their entering the long-distance phone business and manufacturing phone equipment.

They complained Monday that the proposed deal will allow AT&T; to steal their local business by allowing callers to connect directly via cellular phone with the long distance network, never passing through the local system.

Huge sums are at stake. Access charges paid by long-distance carriers to local telephone companies amount to nearly 40% of the cost of providing long-distance service, and account for roughly a quarter of the $100-billion local phone industry.

Whatever the outcome, AT&T;’s latest proposed acquisition is another milestone in the company’s transformation from a staid monopoly utility to a fast-moving enterprise on the cutting edge of “anytime, anywhere” voice and computer communications. Other milestones include AT&T;’s $7.5-billion purchase of computer maker NCR Corp. in 1991, and a group of smaller investments in Silicon Valley start-up operations that occurred more recently.

The McCaw deal grew from last November’s announcement that AT&T; would purchase a one-third interest in McCaw for $3.8 billion. AT&T; Chairman Robert E. Allen and McCaw founder and Chairman Craig O. McCaw said on Monday that difficulty in coming to terms on the first arrangement led them to consider an outright merger.

“After months of trying to solve the problems, we realized that it either had to work as a total or not at all,” said McCaw chief operating officer James Barksdale.

Among the difficulties facing the original deal, Allen said, were conflicting opinions on how to split revenues and profits between the two owners and how much AT&T; would have to pay for a supplemental investment in McCaw.

Allen said he decided to go ahead with a full-blown deal when he returned from a business trip to China on Friday, and the agreement was sealed a day later.

“We really came to a handshake about 7 o’clock Saturday night . . . in the hallway at the Waldorf Astoria,” Allen said. “A merger offers the best, quickest way to go after this market.”

For AT&T; the deal offers a bit of irony. After developing cellular technology in the 1940s, AT&T; did little to turn it into a marketable service. Finally, in the early 1980s, when efforts to commercialize it were successful, AT&T; executives were apparently persuaded to play down its importance by a consultant’s study predicting just 900,000 cellular subscribers nationwide by the year 2000.

A&T; allowed the regional Bell phone companies to take cellular technology in the 1984 split-up and have watched with awe and some envy as the service has grown to attract an estimated 12 million subscribers.

By linking up with McCaw, which markets its service under the Cellular One brand name, AT&T; picks up franchises with 70 million potential customers in 100 cities, including Los Angeles and San Francisco, covering about 30% of the country. McCaw now has more than 2 million subscribers.

An AT&T-McCaw; deal, which would likely take at least a year to complete, is the latest step in the growing consolidation of American telecommunications.

Fifteen months ago, Sprint Corp. announced it would buy Centel Corp. for about $2.5 billion, becoming the first company to operate in the long distance, local and cellular telephone business.

Earlier this year, U.S. West paid $2.5 billion for a 25.5% interest in the cable television programming and operations of Time-Warner Communications. Within months, MCI Corp. said it was selling 20% of its long-distance operations to British Telecom for $4.3 billion.

Beyond the market for mobile phones, however, looms the potentially larger market for wireless data communication via hand-held computers that transmit documents, maps and communications of all types over the radio airwaves. The first such products, including some from AT&T-backed; companies, have been unveiled over the last six months.

“The data devices will be exploding,” Barksdale said.

The merger would give McCaw shareholders one share of AT&T; stock for each share of McCaw common stock and would be tax-free to McCaw stockholders. AT&T; said no jobs would be lost at either company and McCaw’s headquarters would remain in Kirkland, Wash.

What is now McCaw Cellular was founded in 1969 by Craig McCaw and his brothers, who control the company’s stock. With the AT&T; takeover, the family members will end up owning 3% of AT&T;, and Craig McCaw will be the carrier’s largest individual shareholder. McCaw has accepted Allen’s invitation to join the AT&T; board of directors.

McCaw, which reported 1992 revenue of $1.74 billion, has 4,400 employees. AT&T; in 1992 had revenue of $64.9 billion and employs 315,000.

Lazzareschi reported from Los Angeles and Shiver from Washington.