Telephone Giants AT&T;, SBC Discuss $50-Billion Merger

In a deal that would recall the monopolistic days of Ma Bell, phone company giants AT&T; Corp. and SBC Communications are discussing a $50-billion merger that would reunite the world’s leading long-distance company with the two Baby Bells that serve most of the Southwest, including California and Texas.

A source close to AT&T; confirmed Tuesday that the two companies have talked about a deal that would dwarf any merger in corporate history and face intense regulatory scrutiny because of its potential impact on consumers.

A combined AT&T-SBC; would claim 90 million long-distance customers, provide more than 31 million phone lines in seven states and bring in annual revenue of about $75.7 billion. The companies declined to make an official comment. SBC is the parent of Pacific Telesis Group.

“Everyone’s at the dance, and it’s just a matter of time before we see who pairs up with who,” said David Otto, a telecommunications analyst with Edward Jones in St. Louis.

Although the Telecommunications Act of 1996 cleared the way for new alliances in the long-distance and local phone markets, severe regulatory hurdles could prevent an AT&T-SBC; combination for several years, if not forever.

Regulators have been wary of deals that threaten anti-competitive consequences. There is also the not-too-distant memory of the Justice Department’s 1984 effort that broke American Telephone & Telegraph into a long-distance company and seven regional local phone providers.

Consumer groups voiced the loudest opposition to the proposed deal. They said it would be a step backward to the days of limited competition and higher prices, with especially grave consequences for California now that Pacific Telesis has merged with SBC.

“This basically moves in the opposite direction of the competition goals that Congress had in mind under the new Telecommunications Act,” said Gene Kimmelman, co-director of the Washington, D.C., office of Consumers Union. “It combines the local telephone monopoly in California, Nevada, Texas and the rest of the Southwest with the company that was one of the most likely entrants into the local telephone market as a competitor.”

For nearly a year, AT&T; and PacTel have fought bitterly over Pacific Bell’s 77% share of the California local phone market. If the companies were to merge, Pacific Bell’s most ardent enemy would become an ally and could throw its considerable resources behind an effort to thwart competition for local services, said Regina Costa, a telecommunications analyst with TURN, The Utility Reform Network in San Francisco.

“A merger like this would be catastrophic,” Costa said. “Any consumer who had fantasies about choice can throw them out the window.”

Also put at heightened risk are the cadre of upstart firms that have formed in recent years to take advantage of the new telecommunications landscape. They have relied on resale agreements to provide local and long-distance phone services and could see their prospects drop from hopeful to dismal.

“The humongous players will probably make life more difficult for the smaller players,” said Robert Wilkes, an analyst with Brown Brothers Harriman in New York. “It could scare investors so that they’re not as willing to put money into them because they’re afraid the bigger guys would crush them.”

Observers said a merger would make good economic sense for New York-based AT&T; and SBC of San Antonio now that both companies have similar goals--to provide both local and long-distance phone service to customers nationally. A deal would give AT&T; a toehold in the country’s most lucrative local phone markets--where a disproportionate amount of the nation’s calls to Mexico, Asia and Central America originate--and allow SBC to enter the long-distance business at the top of the industry.

Wall Street showed mild approval of the potential merger, which was first reported Tuesday in the Wall Street Journal. Although insiders said the deal is not yet imminent, investors bid up AT&T; stock $1.375 to close at $37.50, while shares in SBC rose 75 cents to $57.625 in New York Stock Exchange trading.

“Strategically it makes a lot of sense for each company to want to do something like this,” said Tod Jacobs, senior telecommunications analyst with Sanford C. Bernstein in New York. “The problem is, it’s going to be very tough to get it by the regulators.”

Analysts said AT&T; and SBC should brace themselves for an uphill battle with regulators, including the Federal Communications Commission, the Justice Department, the Federal Trade Commission and the attorneys general and public utilities commissions of the states in SBC’s territory.

A recent survey by the Yankee Group, a Boston-based consulting firm, shows why regulators would worry about anti-competitive consequences. Two-thirds of households polled would prefer the convenience of buying their local and long-distance service from a single company. Of those, 40% would like to buy from AT&T; and another 40% want to buy from their local phone company.

“If AT&T; were not to attack [the local phone companies], that would be the most substantial pullback of a competitive threat that one could imagine,” Jacobs said.

But Sandra Cook, senior vice president of the San Francisco Consulting Group, which analyzes the industry, said California is such an attractive market that companies will always battle for the privilege of serving it.

“No matter what AT&T; and SBC do, we’ve still got MCI, Sprint, GTE and a huge number of new entrants,” Cook said. “Even if these two giants merge, there is still going to be plenty of competition in the marketplace.”

The likelihood of AT&T; and SBC winning regulatory approval would depend in part on what other companies do in response, Wilkes said. If others merge to reach a comparable size, AT&T-SBC; would not seem disproportionately large and threatening, he said.

Analysts revived their theories that U.S. West or the soon-to-be-combined Bell Atlantic-Nynex would seek a deal with AT&T; rivals GTE Corp., Sprint Communications, Worldcom Inc. or MCI Communications, which is already merging with British Telecommunications. Ameritech and Bell South, the other Baby Bells, are expected to try to go it alone.

The revelation that AT&T; is considering a merger of equals with one of its progeny is seen as a sign that the once-invincible company has failed to capitalize on the opportunities of the new telecommunications market.

AT&T; is reselling local phone service in California and other states and also has ambitious plans to use wireless digital technology to provide dial tones without using the copper wires that connect to homes and businesses. But those efforts may be falling short of expectations, providing a golden opportunity for SBC.

“SBC could potentially stand to take control of the management of AT&T;,” said Brian Adamik, vice president for consumer communications with the Yankee Group. “Most of the executive committee of AT&T; is fairly new to their jobs with the exception of [AT&T; Chairman] Robert Allen. [SBC Chairman Ed] Whitaker is very aggressive, very smart, and he’s surrounded himself with a really strong group of individuals.”

Combined, AT&T; and SBC would bring in more than $9 billion in profit and have nearly 240,000 employees. In addition to California and Texas, SBC provides local phone service in Nevada, Oklahoma, Arkansas, Kansas and Missouri.

At $50 billion, the merger would nearly double the record set by Sandoz Ltd. and Ciba-Geigy Ltd. to form the drug giant Novartis with a $27-billion deal.

* CONSUMER IMPACT: A merger of the two companies would be bad news for customers, James Flanigan writes. D1