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SBC, a Baby Bell, Swallows Its Parent in Deal for AT&T

Posted on: Monday, 31 January 2005, 15:00 CST

SBC Communications on Sunday night was close to concluding a $16 billion deal for its former parent, AT&T, that would lead to the virtual disappearance of one of America's best known corporate icons and set off what promises to be a new round of competition between the Baby Bells, executives close to the negotiations said.

The boards from both companies met for hours on Sunday to complete the deal after several days of talks that were first reported last week. In buying AT&T, its national network and 3 million corporate customers, SBC can aggressively expand into the turf of its regional Bell siblings, who themselves are grappling for ways to move beyond their borders.

AT&T, the former monopoly, has been undone by cheaper Internet technology, growth in a cell phone industry where it has no role, and regulatory changes that squeezed it out of the local phone market.

The AT&T brand and operations will survive inside SBC, which has its roots in the Southwest. But it will disappear as an independent company that for generations provided reliable phone service to the masses and steady returns to shareholders, and at its height employed more than 1 million workers.

"AT&T was America's answer to communism, serving everyone's needs," said James E. Katz, a telecommunications historian. "But neither communism nor AT&T is suited to capitalism in the 21st century. Like other once-dominant players, when the technology changed, it couldn't survive."

Consumers will be largely unaffected by SBC's purchase. AT&T, based in Bedminster, N.J., has stopped marketing its traditional local and long-distance services and prices for these products have been falling steeply regardless.

In expanding nationally, SBC will create a company that largely resembles the former monopoly popularly known as Ma Bell that was broken up in 1984. The acquisition would vault SBC past Verizon Communications, which itself became the nation's biggest telecommunications company when Bell Atlantic bought GTE in 2000.

The companies are expected to formally announce their union today. SBC will pay $15 billion in stock and $1 billion in cash, an amount equal to AT&T's closing price of $19.71 on Friday, the executives said. The new company will have combined annual sales of $70 billion and 212,000 employees, and it could well retain the AT&T name.

The companies expect to generate about $15 billion in cost savings and new revenue. The companies have not decided how many jobs they plan to eliminate. But industry analysts expect SBC to lay off large numbers of workers in AT&T's shrinking consumer division.

SBC's chairman and chief executive, Edward E. Whitacre Jr., will remain in those roles after the acquisition. David W. Dorman, AT&T's chief executive, will become president of SBC. Dorman will also be given one of AT&T's three seats on SBC's board. SBC will keep its headquarters in San Antonio, Texas.

Regulators must approve the deal and they could request certain divestitures. The outgoing chairman of the Federal Communications Commission, Michael Powell, however, signaled last week that the acquisition would not face stiff resistance.

SBC, formerly known as Southwestern Bell, was one of AT&T's oldest affiliates. When AT&T's monopoly was broken up, the company became one of the seven regional Baby Bells.

In one shot, SBC would now become the biggest long-distance carrier and the largest provider of phone and data services to corporate America. SBC also provides local phone service to more than 50 million customers in its 13 states and holds a 60 percent stake in Cingular Wireless, the country's biggest mobile phone company.

In taking over AT&T's $22 billion corporate phone and data business, SBC will add a new source of revenue that will offset the decline in its residential phone business, which has been shrinking with the spread of cell phones and the Internet.

With AT&T's network, SBC will gain the ability to sell services customers outside its region that includes California, Texas and Illinois. This threatens to turn the Bells into direct competitors instead of opportunistic allies that teamed up to fight rivals, regulators and others who have tried to loosen their grip on local service in their regions.

To counter SBC's gambit, the other Bells may consider buying MCI and Sprint, which also sell services to big companies.

"In some ways, what the Bells are doing is defensive," said Robert Rock, a telecommunications analyst at John Hancock Mutual Funds in Boston. "The important thing is to be the prime contractor in selling to companies and you can't do that unless you provide global connectivity. They could be afraid of missing the boat" if they don't act soon to buy a long-distance carrier.

The Bells also want to remain one step ahead of the cable industry that has rapidly expanded into the consumer phone and data markets, but has little presence in the enterprise market.

Source: Deseret News (Salt Lake City)

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