Phone Giants Reportedly Mulling Merger

In a blockbuster deal certain to raise new questions about the mega-merger activity that is sweeping corporate America, telephone giant SBC Communications Inc. is poised to acquire fellow Baby Bell company Ameritech Corp., sources said Sunday.

Such a deal, expected to be valued at between $55 billion and $60 billion, would leave just four of the original seven Baby Bell companies created by the breakup of AT&T; Corp. in 1984, and could signal a speed-up of the U.S. communications industry’s already rapid pace of consolidation.

More important, a merger of San Antonio, Texas-based SBC and Chicago-based Ameritech, adding to the record pace of corporate marriages this year, could challenge the federal government’s original intention in dissolving AT&T; on antitrust grounds more than 14 years ago.

“SBC has clearly signaled its intention to put all of the pieces of Ma Bell back together under their own brand,” Jeffrey Kagan, president of market research firm Kagan Telecom Associates, told Bloomberg News.

Both Bloomberg and Dow Jones News Service reported late Sunday that a deal between SBC--the parent company of California’s Pacific Bell--and Ameritech is imminent. Spokesmen for both companies declined to comment.

SBC would be expected to pay for Ameritech by swapping SBC shares for Ameritech shares. The deal value would almost assuredly be at some premium to the current value of Ameritech’s outstanding stock, now about $48 billion.

At $55 billion to $60 billion in value, a merger between the two companies would be the second-largest ever proposed. The largest deal is the $70-billion-value pending merger of financial services giants Citicorp and Travelers Group, announced just last month.

The communications industry, including local and long-distance phone companies, has been a hotbed of merger activity over the last year, as key competitors have sought to better position themselves in an increasingly competitive arena for communications services worldwide.

Ironically, the merger wave has been spurred in part by the federal government’s move in 1996 to deregulate the local-phone business.

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SBC, whose original territory was Texas, Missouri and Kansas, last year bought Pacific Telesis, the Baby Bell whose primary territory is California and Nevada. SBC also is in the process of acquiring Southern New England Telecom, a Connecticut-based phone utility.

Last year, BellAtlantic Corp., the Baby Bell whose original territory was the mid-Atlantic region, bought Nynex Corp., the New York and New England Baby Bell.

Among other major telecom mergers, long-distance giant WorldCom Inc. has agreed to buy MCI Communications Corp., the onetime upstart that represented one of the first significant competitive challenges to the old Bell system.

But an SBC-Ameritech combination could force federal regulators to rethink consolidation in the phone and telecommunications industry.

Two of the remaining four Baby Bells--SBC and Bell Atlantic--would dwarf the other two, BellSouth Corp. and US West Communications.

That would almost certainly force the latter two to look for merger partners as well, analysts say. Yet the Justice Department would likely frown on a further sequence of marriages among the remaining Bells, analysts believe.

What’s more, federal regulators have repeatedly denied attempts by the Bells to enter the long-distance phone market. That means they would also probably refuse to allow either BellSouth or US West to merge with a long-distance company, such as AT&T;, WorldCom or Sprint Corp.

Last year, when SBC and AT&T; were holding merger talks, then-Federal Communications Commission Chairman Reed Hundt threw buckets of cold water on the potential deal, saying it was unthinkable.

An SBC-Ameritech merger could have a dramatic impact on California by diverting SBC’s attention away from the markets it acquired when it bought Pacific Telesis. SBC has been hit with criticism by California customers, regulators and even some Pacific Bell employees that SBC has not invested as much in the phone network in the state as an independent Pacific Telesis would have invested.

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Overlaying all of this is the Justice Department’s recent signals that it is growing uneasy about some of the gigantic U.S. corporate merger deals of the past year, and the potential for some of the transactions to result in market domination and anti-competitive practices, which could boost prices in the short run and hurt the American economy in the long run.

For example, the government has recently put the brakes on consolidation in the aerospace industry and is seeking to block the proposed merger of Lockheed Martin and Northrop Grumman, after allowing the field of major defense contractors to dwindle to three.

Many U.S. companies have argued that the increasingly competitive and interlinked global economy requires that U.S. firms in effect “eat or be eaten” to survive.