AT&T-SBC Union Now Looks Possible
By Yuki Noguchi
Washington Post
Friday, January 28, 2005

In 1997, when rumors flew that regional phone giant SBC Communications Inc.
and AT&T Corp. might agree to a $50 billion merger, Reed E. Hundt, who was Federal Communications Commission chairman, called such a deal "unthinkable."

"Unthinkable" because just a little more than a dozen years earlier, the two companies were one and the same, part of a sprawling AT&T telephone monopoly that a federal court ruled had become too dominant and needed to be broken up.

The two companies are again in advanced talks to merge, sources familiar with the negotiations said yesterday. This time analysts and others say the potential for such a deal is being greeted much differently.

AT&T is no longer the telecommunications goliath that a judge split into one long-distance giant and several smaller regional phone companies. It could sell for as little as $15 billion because the local phone companies, which became SBC, Verizon Communications Inc., BellSouth Corp. and Qwest Communications International Inc., are now every bit the rivals of their parent -- mostly because of a government decision in 1996 to encourage more competition in the telephone industry.

Not only did the change in regulations pit local phone companies against long-distance firms, but now cable companies offer phone service, as do cellular phone companies. Cheaper technologies such as Internet phone service are making inroads into the mainstream market, whittling even more away from the traditional local phone business.

AT&T has been increasingly hobbled by the resulting price war and sold its cell phone business and cable television empire. AT&T announced last year that it would no longer market long-distance service to residential customers, choosing to focus on business customers, and analysts have predicted it was only a matter of time before it put itself up for sale.

Negotiations with SBC, reported in yesterday's New York Times and Wall Street Journal, started several weeks ago and are "far along," sources familiar with the talks said. San Antonio-based SBC "continues to consider other options" and could still negotiate with AT&T's rival, Ashburn-based MCI Inc. AT&T, meanwhile, could solicit counteroffers from other regional companies such as Verizon or BellSouth, although sources suggested those combinations are not likely.

The sources spoke on the condition of anonymity because the negotiations are continuing. AT&T and SBC declined to comment.

There has been a recent string of mergers in the phone industry. Late last year, Cingular Wireless LLC completed a $41 billion deal to purchase AT&T's spinoff, AT&T Wireless Services Inc. Last month, Sprint Corp. and Nextel Communications Inc. announced their $35 billion plan to combine.

Despite their changing circumstances, any deal between SBC and AT&T is likely to be scrutinized closely by antitrust regulators, said one source close to the FCC who spoke on the condition of anonymity because no proposal has been brought before the agency.

The key concern for regulators could be the overlap of the two companies'
business and residential customers in SBC's territory. SBC is the nation's second-largest telecommunications company, after Verizon. It is the biggest local phone company in 13 states, including California, Texas and Illinois.
AT&T remains the nation's largest long-distance company, with customers in all 50 states. Because of the national scope of the combined businesses, antitrust approval could require a difficult and lengthy review, the source said.

Some consumer activists said they were wary of the deal.

"It is a remonopolization of the phone business," which means fewer new services and higher prices for consumers, said Mark N. Cooper, research director for the Consumer Federation of America.

SBC has 36 million residential customers, but its business overall is eroding because of competition from wireless, cable-phone service, and other newer technologies. SBC is trying to sell more of its local and long-distance services to businesses, AT&T's core strength these days, by offering Internet phone service and packages of wireless and video services.
SBC is negotiating to retain the AT&T brand, a source said.

AT&T is finding it more difficult to remain a stand-alone company. Last week, the company said it expected its $30.5 billion in annual revenue to fall by 15 to 18 percent this year as it exits its consumer business and loses small-business customers. The company, which cut its workforce to about 47,000 last year, plans to eliminate 5,100 more jobs this year.

Some analysts said the deal could shift AT&T's burdens to SBC.

"It's a dumb idea," said Scott C. Cleland, chief executive of the District-based Precursor Group Inc. "SBC has successfully returned to top-line growth" by selling more long-distance, high-speed Internet services, and wireless service, he said. "Why would SBC tie its mast to the fastest-sinking ship?"

Others say buying AT&T gets SBC into the business market quicker than it could on its own.

"It's a great deal for SBC, because AT&T is cheap and it has a great presence in the business market" and has relatively high margins, said Susan Kalla, an analyst with Friedman, Billings, Ramsey & Co.

In a statement announcing quarterly financial results Wednesday, SBC chairman and chief executive Edward E. Whitacre Jr. did not discuss the negotiations except to suggest the company was open to acquisitions. "We will continue to develop our business both organically through investment and opportunistically through acquisitions like those we have done in the past, a strategy that has given us the scale and operating capabilities that we enjoy today."

Staff researcher Richard Drezen contributed to this report.