AT&T-SBC; Deal: ‘Like Putting a Man on the Moon’

As telecommunications giants AT&T; Corp. and SBC Communications Inc. proceed with merger talks, the dark cloud looming over the discussions are the costly and perhaps insurmountable legal and regulatory obstacles that such a deal would face, antitrust and telecom experts said Tuesday.

“It’s like putting a man on the moon,” said David Roddy, chief telecommunications economist at Deloitte & Touche and a former member of the Justice Department’s antitrust division. “It can be done, but it won’t be easy. It will take a long time, and it’s a dangerous mission.”

A deal between the nation’s biggest long-distance company and the nation’s biggest local phone service provider would face the scrutiny of the Justice Department, the Federal Communications Commission, the Federal Trade Commission, public utilities commissions, state attorneys general and Congress. Any one could kill the deal.

Under the Telecommunications Act of 1996, which overhauled the nation’s telephone laws with the intention of increasing market competition, SBC would be required to show there is adequate local competition before it would be allowed to enter the long-distance market or merge with AT&T.;

SBC “is still a monopoly, and they are supposed to stay out of the long-distance business until they’ve solved the local monopoly problem,” said William Baxter, a Stanford University professor who led the original effort to break up AT&T; as head of antitrust under President Reagan. “This is Ma Bell all over again.”

Earlier this month, the Justice Department refused to allow SBC to provide long-distance service to its own customers in Oklahoma because it failed to demonstrate competition.

Although the Justice Department recently approved SBC’s April 1 merger with Pacific Telesis Group and a pending Nynex-Bell Atlantic deal, an AT&T-SBC; merger would have far higher hurdles to clear.

AT&T; is expected to argue that the telecommunications market, transformed by such new services as cellular phones, has become a more open, competitive marketplace. But that could be a tough case to make. In seeking to bar local phone companies from entering the long-distance market, AT&T; itself has been arguing vigorously in courts across the nation that local phone companies remain impenetrable monopolies.

Indeed, AT&T;’s decision to merge with SBC may suggest that establishing competition in local markets is tougher than reformers had hoped.

“It sounds like AT&T; has concluded that the only way they can compete at the local level is to buy the local monopoly,” said Stephen Messer, research fellow at the Columbia Institute for Tele-Information in New York. “If AT&T; can’t compete, how can anyone else compete?”

Some say a merger would not necessarily hinder competition. “As long as other telephone companies, or perhaps cable, can provide competition in the services area, we shouldn’t be overly concerned by this proposed merger,” Rep. Billy Tauzin (R-La.), chairman of the House commerce subcommittee on telecommunications, trade and consumer protection, said in a statement Tuesday.

A Republican congressional source even suggested that SBC might move more quickly to open its markets to competition in an effort to get the merger approved.

The talks with AT&T; are another sign that the industry is moving toward greater concentration rather than the competition legislators had hoped for.

“All the telecommunications companies are specializing,” Roddy said. “Sprint is going to do wireless, MCI is going to do international, GTE is going to do Internet and Bell Atlantic and Nynex are going to be a big local carrier. AT&T; has been sitting at this buffet trying to figure out what to eat.”

It’s a trend consumer groups believe regulators must stop.

“How you can argue that this merger improves competitive prospects is unfathomable,” said Mark Cooper, director of research for the Consumer Federation. “By approving the Bell Atlantic-Nynex merger, [regulators] have encouraged people to find the next outrageous acquisition and see if they can get away with it.”

Even if SBC can prove its markets are open, the Justice Department could still argue that a company with virtually 100% of its local markets and 60% of the long-distance market has simply too much market power.

AT&T;’s brand name is so strong, experts point out, that 60% of the respondents in a recent survey thought that AT&T; was already supplying their local phone services, even though AT&T; has just begun to provide local service.

Federal regulators also could require AT&T; or SBC to sell off a wireless license in markets where both companies have them.

The Justice Department is also likely to be unfriendly to a merger that would undermine one of the bright spots in its antitrust history.

* CALLING UP THE PAST

AT&T; and SBC discuss a merger that would recall the days of Ma Bell. A1

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Regulatory Road

Federal and state regulators would closely scrutinize a merger of AT&T; Corp. and SBC Communications Inc. to determine if it would be anti-competitive. The Justice Department would focus on interstate issues, while the California Public Utilities Commission would review how a merger would affect the state’s telecommunications industry. These agencies, the Federal Communications Commission, the Federal Trade Commission and the other six states where the companies’ services would overlap must approve a merger.

The Regulatory Hurdles

Key issues regulators would consider:

* Whether the merger meets all the requirements of the 1996 Telecommunications Act.

* Whether the combined company would hinder competition for long-distance, local and wireless phone markets and whether the deal would increase the probability of a monopoly in any of these markets.

* Whether the deal is in consumers’ best interest. California regulators would hold numerous public hearings on the proposal.

* Whether the plan abides by the consent decree by a federal court that broke up AT&T; in 1984.

* California regulators could calculate profits the companies could reap and require at least 50% of such profits to be returned to consumers.

*Data taken from a survey of the calling minutes logged by each company on 800 long-distance bills of residential users in California.

Sources: California Public Utilities Commission, Justice Department, PNR & Associates, AP; Researched by JENNIFER OLDHAM / Los Angeles Times

California Impact

A deal would have an enormous impact in California, where SBC’s Pacific Bell has about 80% of the state’s $7.5-billion local phone market and AT&T; commands about 68% of the residential long-distance market.

Residential long-distance market*

AT&T;: 68.2%

MCI: 15.5%

Sprint: 7.4%

Other: 8.9%

Local market

Pacific Bell: 80%

GTE: 18%

Other: 2%

We’re Talking Big

A $50-billion merger of AT&T; Corp. and SBC Communications Inc. would be twice as big as the largest merger in history. The biggest mergers to date:

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Price, Year Buyer Seller (in billions) announced 1 Kohlberg RJR Nabisco $24.6 1988 Kravis Roberts 2 British MCI 21.6 1996 Telecommunications Communications 3 Bell Atlantic Nynex 19.5 1996 4 Walt Disney Capital Cities/ABC 19.0 1995 5 SBC Communications Pacific Telesis Group 16.7 1996 6 Beecham Group SmithKline Beckman 16.1 1989 7 WorldCom MFS Communications 14.1 1996 8 Boeing McDonnell Douglas 13.3 1996 9 Chevron Gulf 13.2 1984 10 Philip Morris Kraft 13.1 1988

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Source: Mergerstat

Telecommunications Giants

Combined, AT&T; Corp. and SBC Communications Inc. would have about 240,000 employees and revenues of about $76 billion. A look at each company:

AT&T;

Headquarters: New York

Employees: 130,000

1996 revenue: $52.2 billion

1996 earnings: $5.9 billion

Chief executive: Robert Allen

SBC Communications

Headquarters: San Antonio

Employees: 109,870

1996 revenue: $23.5 billion

1996 earnings: $3.3 billion

Chief executive: Edward Whitacre