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FEBRUARY 14, 2005
Can The SBC-AT&T Combo Make Money? The colossus has lots of hurdles and little room for error To listen to execs at SBC Communications Inc. (SBC ) tell it, the company's $16 billion acquisition of AT&T is an obvious coup. The San Antonio local-phone giant gets AT&T Corp., the nation's preeminent long-distance network. Along with it comes a who's who of business clients, not to mention enough savings -- $15 billion -- to virtually pay for the deal. No wonder SBC CEO Edward E. Whitacre Jr. calls the deal "a great opportunity." Not so fast. No doubt this deal gives SBC, which had revenues of $52.7 billion in 2004, tremendous scale, making it the country's largest telecom with an estimated $85 billion in 2006 revenue, according to Standard & Poor's. But there's a lot more to success than sheer size. AT&T, with revenues of $30.5 billion in 2004, is a business in serious decline. Achieving those cost savings without disrupting operations will depend on flawless integration of complex systems. And SBC's management is already stretched as it works to blend a series of earlier acquisitions, including last year's $41 billion combo of Cingular Wireless, a unit jointly controlled by SBC and BellSouth, with AT&T Wireless. Most critical of all, SBC must reverse AT&T's shrinking revenues and squeeze new growth out of its own operations. "There are a lot of issues that can go wrong," warns Todd Rosenbluth, telecom services analyst for Standard & Poor's. So just how weak is AT&T? In 2006, when the deal should close, AT&T's revenues are expected to slip 9%, to $23.6 billion, after a 15% drop in 2005; SBC's are likely to grow only 1%, to $61.3 billion in 2006, after a strong 2005. While Whitacre told BusinessWeek "we don't expect to keep losing forever," many just can't make sense of the deal. "It's a monumentally dumb idea for SBC," says Scott C. Cleland, CEO of telecom analyst The Precursor Group. "Who wants to be the largest negative growth company in the country?" No wonder SBC doesn't want to focus on the bleak revenue picture. Instead, it's highlighting the cost savings it will reap from the combination: $2 billion per year starting in 2008 for a total of $15 billion by 2011. Nearly 60% will come from trimming a total of 13,000 jobs, or 6% of the workforce. Reducing head counts at that scale, though, can be tricky. Whitacre got into trouble with consumer advocates and regulators after his late '90s acquisition of Ameritech because SBC chopped so many jobs that regulators said it began to hamper service. And SBC has to be careful not to make the same mistake it has made in the past by quickly showing key executives the door. AT&T chiefs like CEO David W. Dorman and CTO Hossein Eslambolchi, not to mention heads of the Internet business and enterprise sales teams, have knowledge and relationships that SBC desperately needs. If they leave, profits will walk out with them. It also will take a lot more than whacking jobs to get the cost savings SBC is counting on. Whitacre and team will have to tackle the complex task of integrating the two companies' differing network systems. That will involve condensing upward of 20 disparate billing and customer-service systems down to a couple, and using new technology to tie the systems' services together. The challenge, experts say, comes in building new systems that will allow cross-selling of AT&T and SBC services. "It's never easy," says Larry S. Schwartz, head of global operations for Convergys Corp., which manages billing and customer-service systems. The goal of all this rejiggering is to create more solid growth prospects for AT&T's $22.6 billion enterprise unit. The heart of the deal, it sells services to big corporate customers. Reinvigorating it will be key, because SBC needs to counter a flattening revenue base under siege by cable operators like Comcast Corp. (CMCSK ). But SBC has a long way to go. For starters, it will have to beef up the all-important services that surround its new Internet- based networks. Those include consulting on everything from security to Web hosting. Though relatively small now, Internet-based network consulting is the fastest-growing segment of AT&T's business, expanding some 10% in 2004. Still, the unit only amounts to $2.3 billion, or 7.5%, of AT&T's revenues. So it better take off fast. Worse, prices for sending Internet data across the country are falling 8% to 10% a year, estimates Edmond B. Lewis, a partner at telecom consultants RelevantC LLC. Add it all up, and Whitacre faces plenty of roadblocks with scant room for error. Success will depend heavily on just how fast and reliably SBC can build its revenue. And that remains the big mystery. SBC hasn't yet released a revenue growth forecast for the combined company, but Whitacre is confident that AT&T's network will add growth. "I think it's a very positive revenue story going forward," he says. He better be right, since those gains will be key to meeting the earnings goals SBC boasts about. In 2008, AT&T's revenue is expected to be about $20 billion, according to Deutsche Bank Securities Inc. telecom analyst Viktor Shvets. "All it will take is about a 10% miss, and the annual $2 billion in synergies will be wiped out," Shvets says. Yet Whitacre figures he's got little choice but to push ahead. In the new era of communications competition, with cable operators unveiling competitive services at every turn, it's grow or get passed by. To succeed, Whitacre and his ambitious team at fast-growing SBC have plenty of hard work ahead.  By Roger O. Crockett with Steve Rosenbush in New York
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