SBC, AT&T; Boards Agree to Recombine

The board of AT&T; Corp., the nation’s oldest and best-known telephone company, agreed late Sunday to be acquired by SBC Communications Inc. for $16 billion, almost all of it in stock, according to people familiar with the situation.

The historic reunion of the two, which were separated by the 1984 breakup of the AT&T; monopoly known as Ma Bell, would create the nation’s largest telephone company, surpassing another AT&T; offspring, Verizon Communications Inc.

The acquisition, expected to be officially announced today, would combine the second-largest regional phone carrier in the U.S. with the largest long-distance carrier and biggest provider of telecom services to major corporations. The merged operation is expected to save $2.5 billion a year, sources said.

If approved by shareholders and regulators, the deal would propel SBC “not only into the U.S. leadership position but also into a dominant worldwide position,” said David Willis, an analyst at Meta Group Inc. in Stamford, Conn. “It would be the only company with depth in the United States and breadth worldwide.”

The effects would be felt at home and abroad by customers and employees. Job losses are expected.

In the U.S., the acquisition would remove from the scene a company that once had been a leading rival of the four main local phone companies and a thorn in their sides. AT&T; had been one of the few corporations with the political and legal clout to do serious battle to open up the local phone market to more competition.

Its efforts failed, though, when the Bush administration last summer refused to appeal a court order throwing out rules the Federal Communications Commission wrote to encourage competition.

In response, AT&T; stopped marketing residential phone service, conceding that SBC, Verizon and the two other regional carriers known as Baby Bells had won control over local phone service.

An SBC-AT&T; marriage might put pressure on Verizon, BellSouth Corp. and Qwest Communications International Inc. to make bids for the two other major long-distance carriers: MCI Inc. and Sprint Corp.

Sprint, especially, would be hurt by the deal, because it has been preparing to provide wireless service for a new AT&T; mobile phone network. AT&T; had spun off AT&T; Wireless in 2001, and Cingular Wireless, of which SBC owns 60%, acquired the cellular phone company in December.

Internationally, where the AT&T; name is well known, companies such as Deutsche Telekom and Britain’s BT Group will find it tougher to break into the U.S. market if SBC makes the purchase, analyst Willis said. He added that foreign companies would find it “distasteful” bargaining with SBC on fees to complete international calls.

SBC is an especially prickly negotiator on the fees it charges others, working the legal system to get what it wants, Willis said. “The old saw is that SBC is really a law firm with a couple of switches out back.”

Based in San Antonio, SBC has been headed for 14 years by Chairman Edward E. Whitacre Jr., 63, who is known for his outspoken and sometimes belligerent style. He would be chairman and chief executive of the new SBC, and the chairman of Bedminster, N.J.-based AT&T;, David W. Dorman, would be president.

Dorman and two other AT&T; executives would be added to the board of directors and two SBC directors would step down, leaving the company with a 17-member board.

AT&T; has had suitors for years. In 1997, talks between SBC and AT&T; ended abruptly after then-FCC Chairman Reed Hundt said publicly that such a deal was “unthinkable.”

In 2003, BellSouth balked at the last minute at paying $19 billion in stock and cash for AT&T;, which was beginning to make inroads in local phone competition by leasing Baby Bell lines at regulated wholesale prices.

Under the deal, AT&T; shareholders would get $15 billion worth of SBC stock and $1 billion in cash, paid out in a dividend of $1.30 a share. The companies expect the regulatory approvals, including analysis of whether the deal is anti-competitive, to take a year or more.

Consumer groups as well as some lawmakers and industry experts contend that the deal would reduce competition and leave consumers with fewer choices for service and higher prices.

It isn’t known whether SBC would keep the AT&T; brand, which is the most recognized in the industry. The decision would be left to SBC and was not part of the agreement SBC’s board approved Sunday night.

Willis and other analysts said SBC would be foolhardy to give up the AT&T; name and instead ought to be thinking of ditching the SBC brand. At the least, they said, the company should keep AT&T;’s big business unit together and let salespeople show SBC how they captured 30% of the corporate market.

“If brand and presence in large companies is all they want, it’s going to be a disaster,” Willis said. “SBC historically just slaps a brand on existing services, prints brochures and thinks that’s enough. Integration is done.”

SBC has 163,000 employees, including 44,600 in California, where it is the dominant local phone service provider. It said last week it would eliminate 7,000 jobs this year.

AT&T; has 47,000 employees worldwide, fewer than 2,700 in California. It cut its workforce 23% last year as it retreated from the conventional residential market, and had said it would cut 5,100 more jobs this year.