Ma Bell -- reborn
The gigantic AT&T-BellSouth deal could signal a new era of telecom consolidation, and reverse what the government broke up over two decades ago.
By Om Malik, Business 2.0 magazine senior writer

(SAN FRANCISCO) BUSINESS 2.0 Magazine - The mega-billion dollar merger of AT&T and BellSouth is the latest and certainly one of the biggest deals in a telecom industry that has been undergoing a realignment since the turn-of-the-century bust.

Industry insiders believe that it is going to unleash another round of mergers, which could possibly have a far reaching impact on the future fortunes of equipment makers.

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Over past 24-months the telecom industry -- both on the wireless and wireline side -- has consolidated.

SBC bought the old AT&T in January 2005 for about $16 billion and kept the AT&T (down $0.39 to $27.60, Research) name.

Verizon (Research) snapped up long distance provider MCI for $8.45 billion in May 2005. Sprint and Nextel merged.

In recent months, Level 3 (Research), a long distance provider snapped up Wiltel Communications and Progress Telecom.

But they all pale in comparison with the AT&T-BellSouth (Research) deal.

According to terms of the deal, BellSouth shareholders will get 1.325 shares of AT&T for each BellSouth share, or roughly $37.09 per share. That's a 16% premium to the closing price on Friday.

If you include the roughly $21.6 billion in proportionate debt, the total purchase price equals to about $89 billion.

One cannot fault AT&T for making such an audacious move, since it has been runner up in the broadband business to cable providers.

In addition, it has been losing wireline customers to wireless properties, and also to new VoIP-based phone services from cable companies. According to UBS research estimates, there were 5.1 million cable voice users at year end, up 63% annually.

The largest US cable provider, Comcast (Research), has only entered the fray, and will be a fearsome competitor to the Bell operators.

AT&T, however, will be competing from a position of strength, and after the merger closes it will have 71 million access lines and 9.8 million broadband subscribers, just ahead of Comcast's 8.5 million cable modem subscribers.

"It is ironic that market forces are putting back together what the Justice Department broke up with the Judge Greene consent decree (in 1984)," says Sanjay Subhedar, a telecom veteran and now a general partner with Palo Alto-based (and telecom focused) venture capital firm, Storm Ventures.

Many believe that it will prompt Verizon, now the second largest phone company, to respond by making some strategic moves.

Insiders believe that it could go after one of the three companies - Qwest (Research), Alltel (Research) or Sprint.

John Hodulik, an analyst with UBS, believes that while "Qwest seems like the obvious answer," he thinks Verizon will instead stand pat, and try to increase its growth rates and focus more on buying out Vodafone's share of Verizon Wireless.

The cable landscape will be all shook-up says Cynthia Brumfield, President of Emerging Media Dynamics, a consulting firm.

"This development will also no doubt spur stepped-up competitive moves by cable companies in the marketplace, particularly regarding high-speed service," she points out, and believes that the AT&T-BellSouth merger will "also likely stimulate another round of consolidation in the cable industry."

The impact of the AT&T-BellSouth merger will be most acutely felt in the equipment circles, many believe.

"We will soon have three to five providers for all our connectivity needs," says Subhedar. "This will result in consolidation at the (equipment) supplier level especially as legacy equipment makers will fade into the sunset."

It is not going to be easy times for the equipment sellers.

"This enhanced ability to drive a hard bargain would affect pretty much any company that AT&T-BellSouth does business with, particularly hardware and technology suppliers," says Brumfield of Emerging Media Dynamics. "A telco technology maker will be hard pressed to argue with the contract terms requested by AT&T-BellSouth because that would leave only Verizon, and of course tiny Qwest, as potential customers."

Its not all bad news.

While the consolidation of customers means more buying power, it also means more spending and bigger budgets for new technology architectures.

Industry experts believe that the suppliers of new-fangled metro-ethernet gear will come out ahead as a result of this merger.

Of course, the competition with cable industry means that telecoms, even the leviathan-like AT&T, cannot sit on their haunches for long.

Talk back to the editors of Business 2.0 magazine.


Consumer groups look to squash AT&T-BellSouth deal. Click here

For more on the AT&T BellSouth deal, click here Top of page

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