What Telephone Mega-Merger Means
It’s official: SBC Communications and Pacific Telesis Group have merged. Ed Whitacre and Phil Quigley, chairman and vice chairman, respectively, of the newly combined company, announced consummation of the deal Tuesday morning, a year to the day after the two Baby Bells revealed their intent to combine.
Both companies’ boards of directors met Monday afternoon, after the California Public Utilities Commission OKd the deal with a few conditions. It took each board about 45 minutes to give the merger its blessing.
Under final terms of the deal, each share of PacTel stock--which closed Monday at $37.75--will be traded for 0.7315 share of SBC stock, worth $38.68 based on Tuesday’s closing price. That brings the total value of the deal to nearly $16.6 billion. SBC said the merger is the third-largest in U.S. history, surpassed only by the RJR Nabisco-Kohlberg, Kravis Roberts deal in 1989 and Walt Disney’s acquisition of Capital Cities/ABC last year.
Here are answers to some questions about the merger:
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Q: How big is the new company?
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A: San Antonio-based SBC Communications has $23.5 billion in annual revenue and a market value of $47.9 billion. Its brands include Pacific Bell, Nevada Bell, Southwestern Bell and Cellular One. The combined company has nearly 110,000 employees and provides 31.4 million telephone lines to customers in California, Nevada, Texas, Oklahoma, Missouri, Arkansas and Kansas. SBC serves seven of the top 10 markets in the nation.
Pacific Telesis and its Pacific Bell subsidiary will remain in San Francisco, with Quigley as president and chief executive. PacBell will continue to be regulated by the state Public Utilities Commission.
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Q: Why does a local phone company have to be so big?
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A: Experts have envisioned such mega-companies since Congress overhauled the nation’s telecommunications laws last year and allowed local phone, long-distance and cable companies to compete in one another’s markets.
Now the Baby Bells are branching out into markets such as Internet access, data networks, cable television and foreign ventures--and they will soon be allowed to complete with AT&T;, MCI, Sprint and others in the lucrative long-distance business. A bigger company can offer a broad range of services and attract customers by offering one-stop shopping.
In addition, SBC will gain significant economies when it enters the long-distance business because it will be able to keep all the revenue from calls that originate and terminate in its territory, rather than having to pay some of it back to a local phone company for completing the calls.
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Q: How will consumers be affected by the deal?
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A: Pacific Bell will still be the telephone operating company that most customers deal with day to day. The PUC ordered SBC and PacTel to refund $213 million to PacBell ratepayers, which works out to about $3 per customer per year for five years. In addition, the phone company will set aside $34 million to boost telephone penetration in California from 95% to 98%, and spend $50 million over 10 years on consumer education and to bring new technology to underserved areas.
Supporters of the deal--including 118 grass-roots organizations throughout the state--say such initiatives will ensure that California’s poor, minority and non-English speaking communities share in the benefits of the telecommunications revolution.
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Q: What effect will the merger have on the California economy?
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A: Although mergers save money by combining operations and cutting jobs, both companies have promised to create jobs through growth. Quigley expects to add at least 4,000 employees to PacTel’s 50,000-person work force during the next two years, including 1,000 jobs specifically tied to the merger. Economic studies commissioned by SBC say those 1,000 jobs will add $100 million annually to the state’s economy.
SBC will have four headquarters operations in California, including the combined company’s administration and its long-distance, Internet and international businesses. At least one of those headquarters will be in Los Angeles, Whitacre said.
Even more important for the state in the long run, however, is whether SBC maintains a high level of investment in the California telephone network, or instead steers its capital to foreign operations or new businesses such as television service.
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Q: Why were some groups opposed to the deal?
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A: Consumer groups and the PUC’s Office of Ratepayer Advocates pushed for refunds in the $1-billion range. That would have amounted to $12.40 per year for five years, said Tom Long, a senior telecommunications analyst for TURN, The Utility Reform Network in San Francisco.
The Utility Consumer Action Network in San Diego is concerned that SBC won’t invest enough to upgrade PacBell’s infrastructure and that customer service will deteriorate.
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Q: Is this a good deal for shareholders?
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A: PacTel’s stock price has increased 36% since the merger was announced last year. Even with the $248 million in givebacks to California customers, SBC shareholders are getting a good deal too, said Merrill Lynch analyst Daniel Reingold. Investors bid up SBC’s stock 37.5 cents Tuesday to close at $52.875 in New York Stock Exchange trading.
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Q: Will other companies follow suit?
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A: The SBC-PacTel deal was only the first of many mega-mergers brought on by telecommunications reform. East Coast Baby Bells Nynex and Bell Atlantic are seeking permission from federal regulators to merge in a $22-billion deal, and British Telecommunications has made a $20.8-billion offer to buy MCI Communications. Analysts expect more local phone companies to team up with each other, with long-distance firms or with foreign partners.
