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Mother and child reunion?
SBC is said to be interested in spending $15 billion to buy AT&T. But that would be a bad move.
January 27, 2005: 12:37 PM EST
By Paul R. La Monica, CNN/Money senior writer

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Shares of AT&T are close to their 52-week highs, thanks in part to takeover rumors.
Shares of AT&T are close to their 52-week highs, thanks in part to takeover rumors.
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NEW YORK (CNN/Money) Children grow up and often find that, eventually, they need to take care of their parents.

Just look at Baby Bell SBC Communications, which is said to be in talks to bail out (oops, I mean buy) its former corporate mommy, AT&T.

AT&T has been going through a slow, painful decline as its long distance business withers away. SBC meanwhile has been able to take part in some of the few growth areas of telecom, such as wireless and high-speed Internet access.

Shares of AT&T (Research) surged more than 6 percent on Thursday morning due to the takeover rumors and were just a hair below their 52-week high. Long-distance rival MCI (Research) was up nearly 4 percent, so clearly Wall Street is betting that if AT&T gets bought, a takeover of MCI would soon follow.

But before everyone starts singing a celebratory chorus of Peaches and Herb's greatest hit ("Reunited, and it feels so good"), investors in both companies should consider a few things.

First, a deal may never happen. There have been a steady stream of such rumors during the past few years. SBC's "brother" BellSouth (Research) had a deal for AT&T collapse in 2003.

If the SBC (Research) talks fall apart, AT&T investors will be left with shares in a company that will continue to face relentlessly brutal pricing pressures in its core business.

"A deal, for AT&T, makes sense because I really think they would get demolished during the next few years as a standalone company," said Allan Tumolillo, chief operating officer of Probe Financial Associates, an independent telecom research firm.

SBC doesn't need its Ma

Second, for shareholders of SBC, a purchase of A&T just seems to be a bad move. To that end, shares of SBC were down more than 2 percent Thursday morning.

The most often mentioned reason for why AT&T could be a good fit for a Baby Bell is that it has a supposedly lucrative list of large so-called enterprise corporate customers that a Bell can start pitching its other telecom services to. But how lucrative are they really?

AT&T reported last week that total revenues from its business division fell 10 percent in 2004 and that data revenue in the division fell 12 percent. The only way this looks good is when you consider that sales in AT&T's consumer business plunged 16 percent.

"I'm skeptical that enterprise customers are as attractive as Wall Street assumes," said Patrick Brogan, assistant director of research for Precursor, an independent research firm focusing on telecom, media and tech.

Brogan adds that the corporate customers are as price-sensitive -- if not more so -- than the average consumer, so it's not as if competitive pressures are likely to abate anytime soon.

Plus, SBC has already done a solid job of its own in the data and long-distance markets. SBC reported Wednesday that its data revenues increased more than 8 percent in 2004 while long-distance sales surged nearly 29 percent.

Buy MCI or the rest of Cingular instead?

Finally, the rumored takeover price of more than $15 billion -- which doesn't include the $6 billion in AT&T's net debt that SBC would have to assume -- seems too expensive. After all, AT&T's revenues are expected to fall another 15 percent in 2005 so it's not as if AT&T's stock is likely to head substantially higher in the near-term.

"Is SBC buying at the right price? That's the key. It could cost less to do a deal in a year," said Jeff Kagan, an independent telecom analyst based in Atlanta.

But Tumolillo said that if SBC is intent on boosting its presence in the corporate market now, it could get more bang for its buck by purchasing MCI, which has a market value of just $6.2 billion and virtually no net debt following its emergence from bankruptcy.

Finally, there's also the fact that SBC is also in the process of digesting Cingular's acquisition of AT&T Wireless. (Cingular, co-owned by SBC and BellSouth, recently completed that deal.) Adding a purchase of AT&T would be a lot for SBC to deal with.

Plus, it's wireless that makes SBC a remotely compelling growth story in the first place. For that reason,Todd Rosenbluth, an equity analyst with Standard & Poor's, said it would make more sense for SBC to try and buy out BellSouth's 40 percent stake in Cingular instead of going after AT&T.

"There is a need to reduce telecom competition but there are greater opportunities in wireless than long-distance," said Rosenbluth.

So hopefully for SBC shareholders, the company will get over its Oedipal urge to merge with Ma Bell.

Analysts mentioned in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.


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