Magazine

Lord Of The Rings


Edward E. Whitacre Jr. has a thing for airplane hangars. The chief executive of AT&T Inc. (T) has cut numerous acquisitions in these cavernous confines, including his $61 billion purchase of Ameritech Corp. So when Whitacre and BellSouth Corp. (BLS) CEO F. Duane Ackerman were getting close to finalizing terms for AT&T's proposed $67 billion acquisition of BellSouth, the two boarded their corporate jets and flew to a nondescript hangar in Memphis. No deal lieutenants were there. No lawyers or bankers. Just Ed and Duane. Together, they worked the deal out on notepads and shook hands. "We hammered out most of the details right there," Whitacre said in an interview. "We had a feeling that now was the time to do this."

The long-anticipated acquisition looks like a coup for the telecom veteran. Since the Telecommunications Act of 1996 cracked the door to competition, Whitacre has aggressively refashioned his regional telephone monopoly, formerly SBC Communications Inc., into a vast global competitor. He renamed the company AT&T after acquiring the long-distance icon last fall. The BellSouth deal still needs the blessing of shareholders and regulators. But if it's approved, as expected, Whitacre will have created the largest telecom provider in the world, with $120 billion in revenues and a market cap of $165 billion.

UNDER SIEGE

He's betting that size and scale will allow him to seize the crown in his industry. His primary motivation for the latest deal was to get full control of Cingular Wireless, the country's largest wireless provider that's now a joint venture between AT&T and BellSouth. In addition, he figures that with the largest phone company in the land, he'll benefit from economies of scale, providing the cash to push into new markets and develop innovative products. "[The deal] will create a strong national and global competitor, better positioned to innovate and deliver new services to both businesses and consumers," he says.

But the industry Whitacre has worked in his entire life is morphing at light speed, creating challenges and pitfalls for the would-be king. In market after market, his company is under siege by rivals. The raging competition is transforming the telecom industry to the point that its very name is becoming obsolete. Cable companies like Comcast and Net players like Google are pouring into the telephone business, while AT&T and its peers are moving into everything from cable television to computer security. "Sure, AT&T will be big," says Ed Lewis, general partner for consultant RelevantC Business Group. "But they're in a dogfight."

Whitacre's fundamental challenges won't go away with one more deal. His company has dim prospects for growth, with revenue increases expected to average less than 1% for the next five years. Worse, the business that's being picked apart by rivals like Comcast is the traditional phone business, with the rich margins that come from a near-monopoly. Meanwhile, the areas AT&T is moving into, including wireless and cable TV, are much more competitive. The situation is only going to get more difficult. Analyst Anthony Noto of Goldman, Sachs & Co. (GS) believes that companies like AT&T could lose 40% of their land-line residential customers over the next 10 years.

The BellSouth deal risks becoming a distraction from the task at hand. Over the coming months, Whitacre will have to battle consumer groups and rivals who want to stop the acquisitions or impose heavy conditions on its approval. If the deal closes, he'll then have to take on a gigantic integration task, one that includes melding the acquisitions of AT&T Wireless and AT&T. The latter deal closed only five months ago. "The difficulty grows mightily as you layer transaction on top of transaction," says David Barden, analyst at Bank of America.

There's little margin for error. Whitacre paid a hefty premium for BellSouth, 18% more than its market cap the day before the deal was announced. AT&T says it expects to reap $2 billion in cost savings per year. But because of the premium, BellSouth shareholders will reap virtually all of the benefit from those savings. Jeffrey Halpern, an analyst with Bernstein Research, downgraded AT&T after the acquisition was announced, calling its stock "dead money." He cited the company's "willingness to overpay for a deteriorating asset" and "the challenges and risks associated with executing yet another large deal while juggling numerous other operational priorities."

Whitacre's chief competition is coming from cable companies. By bundling together TV, broadband, and newfangled Internet phone service, they're swiping customers from AT&T across the country. They've also struck a partnership with Sprint Nextel Corp. (S), allowing them to offer wireless services. These rivals say Whitacre now has to defend the traditional phone businesses in two regions, his own and BellSouth's. "They're bigger, but their problem is that they're more exposed to cable and wireless competition," says Sprint CEO Gary D. Foresee.

Whitacre wants to counter the threat by making his own wireless company more powerful. After all, wireless is the fastest-growing segment of telecom. Although Cingular is the largest provider in the U.S., with $34 billion in revenues, it lags behind Verizon Wireless in profitability and customer retention.

Whitacre figures full control of Cingular will allow him to move more decisively. In recent months, BellSouth and AT&T have clashed over a variety of issues, including whether AT&T would be able to sell a wireless phone under its own brand using the Cingular network. While AT&T hoped to more easily bundle wireless with phone and broadband services, BellSouth resisted. "They sometimes really struggled to get agreement," says an industry consultant close to the companies. Now, Cingular will take the AT&T name.

RUDE AWAKENING

Another of Whitacre's big bets is on television services. He's laying fiber lines that can carry TV signals throughout his territory, an initiative that he'll carry into BellSouth's region. The idea is to go after the same cable companies that are offering telephone service, so AT&T can match their bundle of services. But the initiative is massively expensive. AT&T is spending $5 billion to upgrade its own networks, and analysts expect it'll pay at least $2 billion on BellSouth's network.

Tough times? Maybe. But Whitacre has never been one to shy away from a tussle. In 2004, when he was trying to buy AT&T Wireless to wrap it into Cingular, a crisis hit. Whitacre thought he had the deal in hand when he got a late-night phone call from his lawyers. They told him Britain's Vodafone Group PLC had outbid him by 50 cents a share. Whitacre didn't blink. He woke up every member of SBC's board of directors for a teleconference at 1:30 a.m. He then pushed for approval to up SBC's bid by $1 a share, or about $3 billion. The board quickly agreed.

This time, Whitacre is facing what's likely to be his last major challenge. He was expected to step down as CEO this fall, after reaching his company's retirement age of 65. But now he will stick around until March, 2008, to run the combined companies for at least a year. "I never had designs on being the biggest," says Whitacre. "I just want to be the best company."

By Roger O. Crockett, with Brian Grow in Atlanta and Spencer Ante in New York


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