AT&T-BellSouth Deal Dials Back Ma Bell

If approved, the deal would restore a significant portion of the national footprint of AT&T as it was before divestiture, at least in the southern portion of the United States.

The merger would also mean the loss of more than 10,000 jobs, AT&T acknowledged on Monday.

When SBC recently completed its acquisition of AT&T, the company surprised most market analysts taking the name AT&T Inc., evoking memories of the former AT&T Co. On Sunday, AT&T offered 1.325 shares of AT&T common stock for each share of BellSouth, or $37.09 for each BellSouth share.

Since the merger would create an AT&T with a national scope rivaling that of the old Ma Bell, some question whether the Justice Department might prohibit the deal. But while today’s telecommunications markets are vastly larger than in the pre-1984 Bell monopoly era, they are also far more diverse. Indeed, the eclipsing of circuit-switched voice by voice-over-Internet Protocol may have rendered the rationale for the 1984 AT&T breakup obsolete, one source said.

“The model for separating interexchange services from local-area services was based on the differing profitability of voice calls,” said the source, a former Qwest executive who now is a consultant for an Internet service provider. But “with the Internet, distance means nothing, and there’s no profit left in TDM voice. There really aren’t any pure-play interexchange companies left, except maybe Level 3 and a couple of others. With cable operators and specialty broadband providers entering the Internet market, even if a complete pre-1984 AT&T footprint were cobbled together, AT&T would have nowhere near the monopoly they had in voice days.”

The BellSouth merger would bring all Cingular Wireless assets and ownership under one roof, since BellSouth holds the minority stock position in Cingular not held by AT&T. Separate branding for Cingular Wireless and BellSouth services would cease as the merger moves forward, with all wireline and wireless services moving under the AT&T brand.

But the former Qwest executive said Cingular has a better brand reputation than AT&T Wireless, a factor that should suggest caution in integrating branding. Wireless’ contribution to revenue in 2007 is expected to exceed one-third the total revenue of the combined companies.

The other significant area of joint development will come in next-generation fiber-to-the curb networks for broadband access. One factor increasing the attractiveness of BellSouth’s region was “fiber optics deeply deployed in the service area,” AT&T chairman and chief executive officer Ed Whitacre said in a statement.

The combined companies would leverage AT&T Labs to accelerate the use of fiber to aid Internet Protocol TV rollouts, Whitacre predicted.

AT&T recently rolled SBC’s Project Lightspeed into a broader residential access program called U-Sphere. BellSouth has offered DSL for Internet access and rebranded DirectTV services for digital television, and it was in the initial stages of offering a passive optical network-bundled service it called integrated fiber in the loop.

Combining the fiber assets of both companies could speed PON-based broadband access in several regions. The two companies issued a statement Sunday predicting that synergies realized from the merger could reach an annual run rate exceeding $2 billion in the second year after closing of the deal, which is expected within 12 months.

Some of those synergies would be realized in the form of reduced corporate staff, though the companies expect that greater savings could be realized from productivity improvements and reduced operational costs for unregulated and interstate services. Half of the anticipated savings, for example, are expected to be realized by moving all traffic from both carriers to one common IP network.

In a Monday (March 6) conference call with financial analysts, Whitacre pointed out that AT&T will buy back $10 billion of its common stock in the next 22 months, "essentially funding our equity with cash."

Randall Stephenson, chief operating officer of AT&T, said both wireline and wireless networks should move to a common Internet Protocol backbone quickly, well before the end of the decade. He said the Cingular wireless network would convert to a 3G UMTS/HSDPA infrastructure by year's end.

All SBC Communications and AT&T networks will be combined by the end of 2006, which "will position us nicely to immediately move to AT&T/BellSouth convergence in early 2007," Stephenson said. Adding IP multimedia subsystem equipment to the network will speed the transition, Stephenson added.

Duane Ackerman, chairman and chief executive officer of BellSouth, said the two companies desire a quick conclusion of the merger to leverage "the opportunity to eliminate signficant redundancy in IP backbones." That would mean combining central-office and point-of-presence operations in the near term and could eventually mean reduced sales for many equipment companies.

A report released Monday by Jo Chiasson, an analyst with Susquehanna Financial Group, noted: "After a strong [year-to-date] run-up, telecom equipment stocks are due to face a cold dose of reality today in light of the AT&T and BellSouth announcement yesterday of their intention to merge.

"In general terms, mergers are bad for telecom equipment vendors in the sense that they: 1) further consolidate carrier buying power; 2) generally lead to some reduction in the level of aggregate capex (versus the two separate entities); 3) delay spending as some network plans are put on hold in the period leading up to the deal consummation and as the organizations meld thereafter."

Chiasson also predicted that the merger's impact on wireless suppliers would be minimal, and that a few wireline OEMs with strong AT&T presence stood to benefit, including Alcatel and Adtran. BellSouth suppliers like Redback Networks, Tellabs, and Lucent Technologies may see negative affects.

The merger could face significant opposition at the Justice Department from consumer groups, however. Both the Consumers Union and the Consumer Federation of America announced Sunday they would file complaints with the Antitrust Division on the basis that the merger would increase long-distance, cellular and local wireline calling fees.

Consumers Union vice president Gene Kimmelman said cable multisystem operators are not strong enough in telephony services to battle a national carrier, while voice-over-Internet Protocol is limited only to consumers with broadband connections. If the deal is not blocked, Consumers Union wants to see at least a mandated spinoff of Cingular, he said.