Business Analysis: US telecoms deal may trigger more bids

SBC pays $16bn for former parent AT&T to create largest player in American market

AT&T, America's oldest communications company, whose roots stretch back to the invention of the telephone by Alexander Graham Bell, is selling itself to a rival which used to be part of its empire.

SBC Communications, one of the so-called "baby bells" which were created when AT&T was forced by antitrust authorities to break up its business in 1984, will pay about $16bn (£8bn) mainly in stock to take over its former parent. The enlarged company will probably keep AT&T's iconic name, which is known throughout the world, in contrast to the relatively obscure Texas-based SBC.

The tie-up will create the largest communications company in the US, and could spark a wave of mergers among other telecoms players, as rivals scramble to remain competitive in the crowded, rapidly developing sector. Companies which are likely to find themselves under pressure to seek deals include Verizon Communications, the largest US telecoms company, and BellSouth. Both are major players in the local phone lines business and could be tempted to link up with the long-distance provider MCI, the business which emerged from the bankruptcy of scandal-hit WorldCom.

AT&T, which has been struggling with declining profitability for years, decided to end 130 years of independence by accepting SBC's offer of stock and a special cash dividend at about midnight in the US after intense discussions over the weekend.

The move received a guarded welcome, with most of Wall Street praising the fact that the merger would bring together AT&T's global long-distance phone line aimed primarily at the lucrative corporate market with SBC's regional network.

The two sides said there would be synergies of $15bn by 2008, in effect wiping out the acquisition costs. Mike Cansfield, a research director at Ovum, a hi-tech consulting company, said: "There is a compelling logic here. AT&T is a long-distance and international company, SBC primarily a domestic and local business. Both are profitable, but having to fight hard in their respective markets. Clearly SBC has decided - rightly - that size matters."

Others sounded a more cautious note due to concerns about the time-lag before the deal starts to benefit shareholders. The merger could also be scuppered by federal and state competition authorities, who are expected to take a year to analyse its implications before giving it the go-ahead. Rivals could also try to impinge on the agreement, which includes a break-up fee of $560m.

For AT&T shareholders, who will receive SBC stock worth $18.41 a share plus a special dividend of $1.30 a share, the move is likely to bring a sigh of relief. Their company's once mighty control of the local and long-distance telephone market has in recent years become a distressed fight against rising competition and enforced disintegration by government agencies.

David Dorman, the chief executive of AT&T, said some people would probably portray the deal as "some kind of bad news for AT&T". Instead, he insisted, the merger would give the company "an opportunity to play a central role in the defining entity of the 21st century".

The company is thought to have been trying to sell itself for some time. After unsuccessful attempts to break AT&T up in 1913 and 1949, the US government filed an antitrust suit in 1974 which led to the splintering of the company a decade later, creating seven regional telephone companies known as "local bells". The move fundamentally weakened a company which, as a monopoly, had been a cornerstone of American culture, bringing the telephone into people's homes.

AT&T's revenues have suffered declines for several consecutive quarters and are set to tumble again this year. The company's value, which peaked in 1999 at $180bn, has fallen to just below $16bn last week, when rumours of the deal with SBC slightly buoyed shares.

The New Jersey-based AT&T, which used to employ 1 million people and provided steady jobs for generations, has a workforce of less than 50,000. Mr Dorman slashed 20,000 jobs in the past two years alone in an attempt to cope with dwindling sales and the $65bn of debt racked up by his predecessor, Michael Armstrong, spent trying to revive AT&T's fortunes through acquisitions and investment in cable television. Mr Dorman will be president of the enlarged company and overall AT&T will have three seats on the board.

The recent history of SBC has been a different story. The smallest of the regional phone companies spun off when AT&T shed its local telephone lines 21 years ago, SBC has mushroomed to become the second-biggest telecoms company in the US after Verizon of New York.

Its rapid growth was orchestrated by Edward Whitacre, a 42-year veteran of the company who will also hold the top job in the enlarged company. He said yesterday: "This is not the largest deal we have done, but it is the most important to SBC at this point in time, because telecommunications is on the cusp of such a large change."

The 63-year-old Texan thought seriously about making an offer for AT&T in the mid-1990s, but walked away when the former Federal Communications Commission chief, Reed Hundt, deemed such a reunion "unthinkable". Instead, SBC expanded by snapping up other regional players, including San Francisco-based Pacific Telesis in 1997 and Ameritech in the Midwest in 1999. SBC also owns a 60 per cent stake in America's largest mobile phone provider, Cingular Wireless, and in 2001 shelled out $300m for a 3 per cent stake in Yahoo!, creating a joint internet-access service for consumers.

After one failed attempt to leapfrog the other baby bells by buying "Ma Bell", as AT&T was known for years, Mr Whitacre has lobbied in Washington for relaxation of pricing and ownership regulations on the grounds that the telecoms market has changed. He and others have argued that there are now a myriad of competitors, pushing down prices in their rush to become suppliers of short and long-distance phone lines, mobile phone providers and data and television services.

Analysts noted that while the deal is likely to get the green light from regulators, it will allow SBC to pick up one of America's most important blue-chip companies for a fraction of its former value, and in the process gain a dominant position in a variety of key markets. Whether that will be celebrated by the politicians and regulators who forced AT&T's break-up two decades ago remains to be seen.