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JANUARY 27, 2005
By Steve Rosenbush How Badly Does SBC Want AT&T? Despite analysts' doubts that the mooted marriage makes sense, the key players' sense of destiny may see a fast trip to the altar
AT&T's days as an independent company may be just about finished. The outfit is in serious talks to sell itself to telecom giant SBC Communications (SBC ) in a deal worth nearly $16 billion, say people familiar with the matter. There's no guarantee that an agreement will be reached, but some people close to the talks think an announcement could be made by Feb. 4. The acquisition would turn SBC into the key provider of communications services for large companies and government agencies. AT&T (T ) still dominates that business, with clients like Citigroup (C ) and Barnes & Noble (BKS ). That would make SBC less reliant on the consumer market, where it faces mounting competition from cable-TV companies. It holds the second-largest share of local-phone lines behind Verizon Communications (VZ ). It also faces enormous competition in the wireless market, where it owns a majority of market leader Cingular. "MONUMENTALLY DUMB IDEA." But the extension of SBC's business could come at a big price. "AT&T is a motivated seller and is speaking with all potentially interested parties, but its business profile is not attractive enough" for the Bells, Lehman Brothers telecom analyst Blake Bath said in a report. A deal would "significantly reduce" SBC's growth profile. The market for big business services is shrinking 10% a year, and profit margins are falling. He thinks SBC is better off focusing on the integration of the former AT&T Wireless business into Cingular. SBC would be risking a lot by acquiring AT&T. Revenue at the $30 billion company is declining by more than 15% a year, according to Scott Cleland, telecom analyst at independent researcher Precursor Group. "It's a monumentally dumb idea," says Cleland. "SBC would become the largest negative-growth company in the S&P 500." Winning regulatory approval might not be worth the effort. The deal probably would be approved by regulators, but SBC would have to run a gauntlet of state and federal officials. But there's less overlap in the two outfits' businesses than in 1997, when an earlier merger attempt was deemed "unthinkable" by Reed Hundt, then-chairman of the Federal Communications Commission. "We think AT&T would be an interested seller at the rumored price, but we remain unconvinced the transaction, while doable from [the] regulatory perspective, would create significant value for SBC shareholders," Legg Mason telecom analyst Blair Levin said in a report. Levin is a former FCC official who served as Hundt's chief of staff. MCI NEXT? Investors and analysts were skeptical about the value of an AT&T-SBC merger. AT&T shareholders, who would have the most to gain, bid the stock to $19.62, up 6%, in midday trading on Jan. 27. But SBC shares fell 2%, to $24.07. There was no official response from either company. SBC declined comment. AT&T executives didn't return calls seeking comment. Investors also bid up shares of AT&T rival MCI (MCIP ), on the theory that an AT&T deal would spark a new round of industrywide consolidation. MCI rose 3.7%, to $19.35. But it's uncertain that MCI, which emerged from bankruptcy last year, would be sold. Verizon would make an obvious partner, but it might not be interested. Verizon considered acquiring AT&T last year, people familiar with the matter say, but passed on that deal because of AT&T's financial situation. It probably wouldn't feel pressured to bid on the smaller and less profitable MCI. Verizon CEO Ivan Seidenberg told investors that an AT&T-SBC deal wouldn't force him to change strategy. For now, Verizon is organically building its so-called enterprise business, which serves large corporate customers. The $8 billion unit grew 2% last quarter, while AT&T's revenue fell. Verizon sells to most large corporations but wins only a small amount of each company's business. STORIED PAST. Verizon is trying to boost that share. Thanks to its New York base and presence in Washington, D.C., and Boston, it may have a better chance than San Antonio-based SBC of organically building its corporate-services business. A deal would end one of the longest and most dramatic stories in the history of business. AT&T, which traces its roots to a company formed by telephone inventor Alexander Graham Bell in the 1870s, became one of the largest and most powerful corporations in the world, carrying nearly all U.S. phone traffic until the early 1980s. Its Bell Labs research unit, now owned by spin-off Lucent Technologies (LU ), invented the transistor and other crucial innovations. But AT&T was hobbled by antitrust suits, deregulation, and technological revolutions such as the Internet and wireless phones. It also made a series of big acquisitions and restructurings in the late '90s, none of which worked out. A sale to SBC would be a milestone for the telecom industry. Since AT&T was broken up in 1984, the market has been divided into local and long-distance phone sectors. Although the two sides have competed in each other's businesses in recent years, a merger between SBC and former corporate parent AT&T would dismantle much of what remains of the industry structure created by regulators 20 years ago. Other independent long-distance businesses like Sprint (FON ) and MCI would be under great pressure to find their own big partners, although it's uncertain they would succeed in that quest. QUICK COURTSHIP. The outcome of the SBC-AT&T talks won't be driven solely by the financial issues. The CEOs will play a crucial role, as they do in many multibillion-dollar transactions. In this case, both leaders want a deal. AT&T CEO Dave Dorman wants to sell. He came close to finding a buyer in BellSouth (BLS ) a few years ago, but the companies couldn't agree on price. Dorman wanted more than $20 billion, but BellSouth balked after looking at AT&T's books, people familiar with the matter say. But every passing month sees more pressure on Dorman to sell the company and forego the glory of winning a big premium. SBC is run by Ed Whitacre, the most acquisitive CEO in the industry. He bought Pacific Bell and Ameritech, and drove Cingular to buy AT&T Wireless last year. At 63, he's nearing the end of his career. If he believes its SBC's destiny to buy AT&T, he's unlikely to leave that job to a successor. Unless investors throw an absolute fit, he may very well have AT&T in the bag before the coming week is finished.  With Brian Grow in Atlanta, Roger Crockett in Chicago, and Catherine Yang in Washington, D.C. Rosenbush is a senior writer for BusinessWeek Online in New York Edited by Beth Belton
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