SBC/AT&T Deal Heats Up Enterprise Market

AT&T's board approved the $16 billion acquisition early Monday. Pending regulatory approval, the deal is expected to close by the first half of 2006, according to SBC, San Antonio.

With the deal SBC takes possession of AT&T's "global systems capabilities, business and government customers, and fast-growing Internet Protocol-based business." SBC will combine these tools with its own local exchange service, broadband and wireless solutions to create "a new company to accelerate customer transition to advanced IP solutions and services," according to an SBC statement issued Monday.

Most investment analysts said the big take for SBC is AT&T's enterprise customer base. With it, SBC should be better able to compete with Verizon, BellSouth and, in particular, MCI for enterprise market share.

"SBC has definite weaknesses, especially in the enterprise sector," said Allan Tumolillo, COO of Probe Financial Associates, in a statement. Tumolillo added that the completed merger "would allow SBC to leap ahead of Verizon and BellSouth and challenge MCI for enterprise market leadership."

"With AT&T strong in many of Verizon's enterprise market centers--New York, Boston, Washington, D.C.--SBC has no choice but to challenge Verizon in those markets for business customers. This may lead Verizon to capture MCI," said Tumolillo.

Tumolillo also said the merger "would be the catalyst for a rapid consolidation of the U.S. telecom industry."

The task of integrating SBC and Bedminster, N.J.-based AT&T will not be an easy one, said Tumolillo. "SBC will have its hands full, though, as the AT&T network assets are a mess, as admitted by AT&T itself. SBC will find itself attempting to manage two integrations at once: AT&T and AT&T Wireless."

Other financial analysts agreed the deal could increase the incentive for Verizon to make a bid for MCI in an effort to match SBC's newly acquired enterprise market share.

"The deal also brings SBC in direct competition with BellSouth for enterprise customers within BellSouth's footprint, which may put some strain on [BellSouth's] Cingular partnership. Verizon's multiples are also likely to suffer as investors speculate over a potential bid by the company for MCI to match the new SBC/AT&T capabilities on the enterprise side and to protect its valuable Northeast franchise," analysts from Buckingham Research Group said in a research note issued early Monday.

The analysts said BellSouth has actually been seen as a merger/acquisition candidate for SBC and is still a possibility, although any deal would have to wait until the SBC/AT&T merger closes, which would be "at least through 2006."

Meanwhile, analysts at Marquis Investment Research were somewhat skeptical about the SBC/AT&T deal itself. "[It] still makes little sense to us for the following reasons. Cingular is already doing too much with AWE [Alternative Work Environments] integration, FTTP/FTTN, DISH reselling, IP TV, Wi-Fi, VoIP, GSM migration, etc. AT&T doesn't really seem to help SBC revenue other than in enterprise business, which SBC doesn't really seem ready for," analysts said in a statement.

On Monday, Merrill Lynch analysts James Moynihan and David Janazzo issued a "no rating" evaluation on AT&T stock due to the fact it was headed toward acquisition and "no longer trading on fundamentals." The two said they expect to see AT&T's stand-alone revenue "decline by approximately 15 percent year over year as the deal concludes. "We expect there to be substantial synergy savings associated with the deal, primarily related to head-count reductions," they said.

At noon Monday, shares of SBC were up slightly, trading at $23.92. Shares of AT&T were down 3 percent to $19.11.