Baby Bells Plan Record Merger; Fight Expected

By ELIZABETH DOUGLASS and JUBE SHIVER

May 12, 1998 12 AM PT

TIMES STAFF WRITERS

SBC Communications’ plan to buy Ameritech Corp. in a deal valued at $56 billion would create a telecommunications behemoth with access to about 52 million local phone lines across the country. But it’s already clear that the proposed mega-merger faces a protracted fight.

The marriage of the two Baby Bell companies, announced Monday, must win approval from the Department of Justice, the Federal Communications Commission, state agencies and authorities in Europe. That process could take a year to 18 months.

“SBC and Ameritech must show us that this merger will serve the public interest and enhance competition,” said FCC Chairman William E. Kennard.

The deal between Chicago-based Ameritech and San Antonio-based SBC--the parent company of California’s Pacific Telesis--would reunite three of the original seven Baby Bell companies that resulted from the 1984 breakup of AT&T.; That prospect left consumer groups vowing to derail the deal.

“Core customers in [Ameritech’s] region could face substantially higher prices and no real choice,” said Gene Kimmelman, co-director of the Washington, D.C., office of Consumers Union, which will ask federal regulators to block the deal. “The market is developing such that there’s a dominant company and no one else is in the position to build lines to the homes and compete head-to-head.”

Much of the criticism stems from the sheer size and clout of the post-merger company, which would dominate the nation’s $100-billion local phone market because of its hold on 13 states--including California, Texas, Illinois and Michigan--and its access to about 40% of the country’s local phone lines.

In addition to its U.S. dominance, the enlarged SBC would have substantial overseas operations, including partnerships in South America, the Middle East, Asia, Latin America and throughout Europe.

Both companies also have robust wireless communications businesses, although they would have to give up licenses in markets where the two companies overlap, such as St. Louis and Chicago.

All of these components are key to the company’s stated “national-local” strategy, which involves offering customers one source for local and long-distance phone service, Internet access and wireless communication services.

SBC Chief Pledges to Hire More People

The merged company would be called SBC and would be headed by SBC Chairman and Chief Executive Edward E. Whitacre Jr.

Richard Notebaert would remain as chairman and chief executive of Ameritech, which would become a subsidiary of SBC and continue to use the Ameritech name in its service areas.

The combined company would employ more than 191,000 people, and Whitacre pledged to increase the payroll.

To allay fears that its heft would stifle U.S. competition, SBC said it would offer local phone service in 30 major U.S. markets served by rivals--ranging from New York to Denver--marking the first time a Baby Bell has mapped out a major assault in a new territory.

“This is about more competition, not less,” Whitacre said. “We are promising that we will go outside our geographical area to provide both residential and business competition.”

In addition, the two companies said Ameritech would proceed with its plan to offer local phone service in St. Louis, where it had been gearing up to compete against SBC.

Calling the deal an “industry-transforming” event, the two companies said the merger would allow SBC to “accelerate and expand telecommunications competition” by giving it the strength to vie for customers outside its home phone markets.

“We like to think of this as Viagra for competition,” said Notebaert, referring to the new drug to counter male impotence.

But regulators might not see it that way.

Although two mergers involving Baby Bell companies won government clearance last year, the scope and timing of the SBC-Ameritech pact could make a difference with regulators, who have been criticized for being lax on antitrust matters.

And lawmakers have been wrestling with the fact that recent mergers are reversing the 1984 breakup of AT&T; and that the landmark 1996 Telecommunications Act has not brought competition in residential markets.

“This latest attempt to put Humpty Dumpty back together again must be stopped,” said Rep. Edward J. Markey of Massachusetts, the ranking Democrat on the House Telecommunications subcommittee.

There were other early signals Monday that the latest telecom mega-merger would be no walk in the park.

SBC shares fell $3.56, or 8.4%, to $38.81, while Ameritech shares rose $2.13, to $46. Both trade on the New York Stock Exchange. The announced value of SBC’s offer was $61 billion based on Friday’s stock prices, but the sharp drop brought the value of the deal down to $56 billion. Under the deal, shareholders of Ameritech would receive 1.316 shares of SBC stock for each share of Ameritech stock.

But many Washington antitrust experts and former government officials said regulators would be hard pressed to bar SBC’s acquisition of Ameritech after having approved a string of telecom mega-mergers in recent years, including Bell Atlantic’s $25.6-billion purchase of Nynex Corp. in 1997 and SBC’s $16.6-billion merger with Pacific Telesis Group that same year.

The merger does not require approval by California regulators. But state officials can review the deal’s impact in California and impose new conditions on SBC’s 1997 merger with Pacific Telesis.

In Ohio, a state that would have a say in the outcome of the merger, regulators signaled that they would focus on how the deal would affect local telephone rates.

“We will definitely be scrutinizing this deal closely,” said Jolynn Barry Butler, a member of the Ohio Public Utilities Commission and president of the National Assn. of Regulatory Utility Commissioners.

Although SBC and Ameritech have contiguous phone markets and directly compete in the cellular phone business, the same problems existed with some other mergers, notably the Bell Atlantic-Nynex merger, experts said.

“I think this deal will pass regulatory scrutiny,” said Andrew C. Barrett, a former FCC commissioner who also regulated Ameritech on the state level when he served on the Illinois Commerce Commission in the 1980s. “It seems to me this deal fosters competition . . . [and is] no different than the other deals the [FCC] looked at.”

Antitrust Policy Criticized

Even Consumers Union, which has staunchly opposed telecom mergers in the past and vowed to oppose the latest deal, conceded the transaction will be difficult to block outright under the Clinton Administration’s current interpretation of antitrust law.

“This deal shouldn’t pass regulatory scrutiny, but the fact that this thing has gotten this far indicates something is seriously wrong” with Washington antitrust policy, the Consumers Union’s Kimmelman said. “This deal is dramatically uncompetitive for consumers. It’s time for Congress to undo their handiwork and revisit the telecom act.”

The landmark federal Telecommunications Act of 1996 was supposed to open the nation’s heavily regulated telephone industry to greater competition.

Although businesses have seen some increase in phone competition, the law has mostly served to ignite massive industry consolidation.

Robert Atkinson, senior vice president of regulatory affairs at Teleport Communications Group, a Baby Bell rival, alleged that Bell Atlantic has become increasingly bold in thumbing its nose at federal regulators, after pledging to take special steps to promote competition in its local phone markets.

“Bell Atlantic has made no better progress than any other” regional Bell phone company, Atkinson said. “Every single transaction or order we place with them is a hard and difficult fight. It is laughable to suggest that local telephone competition is here or has increased” as a result of these mergers.

Times staff writer Karen Kaplan contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Then and Now?

SBC Communication’s proposed $56.6 billion acquisition of Ameritech Corp. would create a company with about half AT&T;’s assets before its divestiture in 1984:

AT&T;*

Assets: $150 billion

Employees: 1 million

Revenues: $69 billion

Services offered: Local, long distance, and equipment

Competitors: Virtual monopoly

SBC/Ameritech

Assets: $67.4 billion

Employees: 189,000

Revenues: $41 billion

Services offered: Local, and wireless service

Competitors: Dominant in its local markets.