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SBC sets $3.9B purchase
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February 22, 2000: 1:58 p.m. ET
Baby Bell to buy Sterling Commerce, e-commerce software provider
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - SBC Communications Inc. is buying Sterling Commerce Inc., a provider of software and services for online commerce, for about $3.9 billion.
The San Antonio, Texas-based regional phone company that has used acquisitions to grow rapidly agreed to pay $44.25 a share cash, about 40 percent above Sterling's closing price Friday. SBC said the deal will give it a jump-start in the rapidly growing field of business-to-business e-commerce.
"Business customers are demanding full solutions ... managing their services, both voice, video and data as well as providing the type of business to business e-commerce solutions we're talking about here," said Rich Dietz, president of SBC global markets division, in an interview on CNNfn.
Problems as well as potential
Despite the potential, the deal also highlights some challenges for the acquisition-hungry SBC (SBC: Research, Estimates), which last year bought fellow Baby Bell Ameritech for $74.1 billion in stock.
This time it was forced to do an all-cash deal, rather than use its stock, primarily because of a depressed value in its own stock, which was trading at about 19 times earnings as of Monday.
This deal, which is expected to close by mid-year, is likely to be slightly dilutive to earnings. But Steve McGaw, SBC's managing director of corporate development, said that due to expected incremental gains in revenue and cost savings from the deal, SBC is not changing its guidance on 2000 earnings to analysts.
Analysts surveyed by earnings tracker First Call forecast 2000 earnings for SBC of $2.27 a diluted share, compared with $2.15 a share last year.
The deal is likely to be its only major purchase in the e-commerce arena, said McGaw, although he said some smaller deals might yet be possible.
Analysts see a good fit for both companies
Regional telephone companies such as SBC have seen their fastest growth in new products such as cellular and Internet services over the last year, Vince Farrell, chairman and chief investment officer of Spears Benzak Salomon & Farrell, said on CNNfn's Ahead of the Curve early Tuesday.
"I think all the other phone companies, if they've not done it, they'll be doing it," he said of SBC and e-commerce acquisitions. "Whether this is a good price or bad price, sometimes you have to pay up to get that market position." (155KB WAV) (155KB AIFF)
Other analysts said they thought the deal was a good fit for both companies.
"It gives SBC another important capability to allow them to keep existing customers and potentially win new customers," said Robert Wilkes, analyst with Brown Brothers Harriman & Co. "I don't know if this forces competitors to respond, but the ability to facilitate e-commerce is something the phone companies will have to look at providing."
Sterlings stock also under pressure
Sterling Commerce (SE: Research, Estimates) reported fiscal 1999 revenue of $561 million. The Columbus, Ohio-based company provides e-commerce software and services to Wal-Mart Stores Inc., Johnson & Johnson, Sony Corp. and BMW, as well as almost all of the Fortune 500 companies.
Sterling's stock also has been under pressure since it reported disappointing results for the third quarter of 1999, due to problems with its XcelleNet subsidiary. Two solid quarters since have done relatively little to lift the stock, which has trailed the Nasdaq composite index since that time. The selling price is just below the 52-week high of 44-1/2 reached in May of 1999.
"They were hot for a while on Wall Street but for the last year it's been pretty taxing," said Todd Weller, analyst with Legg Mason. "Under SBC, they'll be able to concentrate on execution, which is what I think management wants to do. I think it's a great move for them."
Shares of Sterling soared 11-15/16, or 38 percent, Tuesday afternoon to 43-1/2, just under the purchase price. Shares of Dow component SBC fell 2-3/8, or 6 percent, to 35-7/8 in late morning trading. 
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