In addition to propelling the combined entity past Verizon Wireless as the nation’s largest wireless carrier, Cingular Wireless L.L.C.’s successful $41 billion acquisition of smaller rival AT&T Wireless Services Inc. is expected to have an enormous impact on many of its competitors as well as companies with ties to AWS or Cingular.
Cingular likely will be the most impacted company because it will have until the end of the year to integrate AWS’ more than 22 million subscribers onto its wireless network. The process is expected to be eased by both carriers using similar network technology, but back-office services could be more challenging.
Analysts note that on the positive side the new Cingular will have an abundance of spectrum to handle its more than 46 million subscribers and will increase its nationwide presence from 87 to 97 of the nation’s top 100 markets. The carrier’s new spectrum-which includes the recently approved acquisition of 34 licenses for $1.4 billion from NextWave Telecom Inc. as well as a number of smaller acquisition and market swaps-is also expected to bolster Cingular’s next-generation network plans including its eventual move to UMTS services.
“We do not have any specific date for rolling out UMTS, but picking up more bandwidth will definitely make the decision easier,” said Alex Moraitis, vice president of data sales at Cingular.
Analysts predict Cingular will move ahead with AWS’ previously scheduled launch of a handful of UMTS markets by the end of the year through an agreement with NTT DoCoMo Inc., but note Cingular’s conservative data plans could push off further deployments well into next year. Moraitis noted that Cingular expects to launch EDGE services across its current network by this summer, which-when combined with AWS’ nationwide EDGE network, both carriers’ GPRS networks as well as Cingular’s Mobitex network-should provide the carrier with a wealth of data options.
One potential roadblock to Cingular’s new-found spectrum riches could come from government regulators that could force the carrier to divest some licenses in a number of markets before approving the merger. Legg Mason Wood Walker Inc. speculated that the markets most likely to come under government scrutiny include those where Cingular and AWS own both the A- and B-side cellular licenses, including Dallas, Miami, San Antonio, Oklahoma City, Orlando and Jacksonville, Fla. Raymond James & Associates noted those divestitures could amount to 20 million pops and 3 million current customers.
Cingular countered the possibility of government-mandated divestitures, saying most markets still will be served by a number of wireless options.
“We think we can put forward a very fair and reasonable position that there should be no divestitures considered,” explained Cingular CEO Stan Sigman. “This is moving the market place from six national carriers and two or three regional, niche players in each major market down to five and still the niche. So it’s not the consolidation in our view that would require divestitures, but we will have to put that position in front of the appropriate parties.”
Cingular hoped to stem any potential divestitures by setting an $8.25 billion limit on divested assets in regulatory filings related to the merger. If the divested amount exceeds the limit, either company could walk away from the deal.
Back-office integration
Another challenge for Cingular will be integrating the back-end services between the two companies. Recent software disruptions at AWS point to the challenges of just one company trying to upgrade its software infrastructure; trying to merge two separate entities could be a monumental task to complete before the end of the year.
“Combining the two companies doesn’t wipe away their individual problems,” said Bob Egan, founder and president of Mobile Competency. “If anything, the complexity of integrating two major companies will only exacerbate them.”
A consumer survey by BIGresearch found that 38 percent of cell-phone customers using one of the two companies rated their service as average or below average.
“Customers are lukewarm about the service they’re currently receiving from these two companies,” said Gary Drenik, CEO of BIGresearch. “Putting them together does not necessarily mean that will improve.”
Cingular downplayed the task, noting it had plenty of experience in merging operations, pointing out its own genesis from the wireless operations of its parent companies SBC Communications Inc. and BellSouth Corp.
Partnership questions
Further clouding the merger are AWS’ current relationships that range from network affiliates to international partnerships. AWS has a number of network partners including Triton PCS Holdings Inc., Cincinnati Bell Wireless and Edge Wireless, as well as roaming agreements with most rural providers and a wireless Internet technology agreement with DoCoMo.
Triton PCS’ stock saw an initial run-up similar to AWS when rumors of a potential sale surfaced last month. The stock has since flattened out. Triton also has a deal with AWS to use the AT&T Wireless name in marketing service along with Triton’s own SunCom brand, as well as roaming agreements with both AWS and Cingular that include a non-compete clause in its Southeast markets.
Rural carrier Dobson Communications Corp., which has had network-sharing agreements with AWS in the past and is currently tied to AWS as its largest roaming partner, witnessed its stock price fall more than 35 percent following news of the merger and lower-than-expected 2004 financial forecasts.
DoCoMo has also been moved aside by the merger as its once 16-percent stake in AWS-for which it paid $10 billion in 2000-will be turned into $7 billion in cash with no stake in the new operation. While DoCoMo said it was reviewing its options, the Japanese telecom giant has recently cashed out a number of its international ventures, though Cingular left the door open to working with DoCoMo in the future on its next-generation plans.
“I personally have not had any discussions with DoCoMo on developing third-generation services, but I have a great deal of respect for their technology, talent and understanding of the market, and I would welcome the opportunity to learn from them and explore opportunities with them,” said Sigman.
Cingular also will have to revisit its own partnerships as the carrier probably won’t need to continue its network-sharing arrangement with T-Mobile USA Inc. that gives Cingular with access to T-Mobile USA’s New York network in exchange for T-Mobile USA using Cingular’s network in California and Nevada. While Cingular said it was happy with the relationship, analysts question whether it makes financial or competitive sense for Cingular to continue to pay for access to New York when it has a capable AWS network in the Big Apple as well as allowing T-Mobile USA customers to continue to clog its California network.
If the network-sharing arrangement does evaporate, T-Mobile USA will be left with a giant California-size hole in its nationwide network, which could require a hastily assembled network buildout or at least roaming agreements to fill.
Employees
In addition to dealing with network partners, Cingular will have its hands full integrating AWS’ approximately 30,000 employees. One of Sigman’s main talking points about the merger was the synergy he expected to capture from the deal, which is expected to include the streamlining of both companies’ workforces.
“Clearly there are significant synergies that can be captured by putting these two companies together,” Sigman explained. “There will be employees that are affected by this, what that number is we do not have that insight into, we are not at that level of planning yet. There will be opportunities for good employees.”
Sigman added that while the company’s headquarters would remain in Atlanta, he did not think it would be necessary to have all employees relocate to th
e area leaving open the chance that AWS employees that are retained could remain in either the Redmond, Wash., or northern New Jersey area.
“[The deal] doesn’t mean either expansion or contraction, we are not at that level of planning,” Sigman said. “I don’t necessarily believe that everyone has to be co-located. I’m not driven by the belief that everybody has to be in the same location.”
Who’s No. 1?
If the integration process does run into problems, a number of industry observers predict CDMA operators Verizon Wireless and Sprint PCS, which have moved from the first- and fourth-largest domestic carriers respectively to the second and third largest, will be quick to capitalize.
“Over the short term the nature of a merger will likely result in provider distraction, which provides an opportunity for these carriers’ rivals, particularly the two CDMA providers,” noted Forrester Research.
Despite AWS’ CEO John Zeglis’ jab at Verizon Wireless during a conference call last week when he said: “Hey Verizon, can you hear us now,” Verizon Wireless is not yet ready to relinquish its title as the nation’s largest wireless carrier. With nearly four quarters of potential customer growth ahead of the industry before the merger is expected to be complete, analysts note Verizon Wireless is capable of wiping out a substantial portion of the approximately 8 million subscribers it trails behind a combined Cingular/AWS.
Analyst also expect Verizon Wireless, and to a similar extent Sprint PCS, will put a high priority on trying to attract disenfranchised AWS customers that may be looking for an alternative to joining Cingular before the end of the year. There are also hints that Verizon Wireless is setting itself up to possibly make an acquisition of its own to bolster its reach.
Verizon Wireless could also see its ownership structure altered following Vodafone’s attempt to acquire AWS. Vodafone chief executive Arun Sarin, who would have had to sell off Vodafone’s 45-percent interest in Verizon Wireless had it successfully acquired AWS, said last week that the carrier was “not conceptually opposed to not being in the U.S.” Verizon Communications Inc., which owns the remaining 55 percent of Verizon Wireless, has said it would be interested in owning the entire venture, which makes separation a possibility.
Regional carriers Alltel Corp. and U.S. Cellular Corp. could also see some benefits from the Cingular/AWS merger if they are forced to make divestitures. Most of the markets analyst claim will be looked at closely are in the Southeast, which plays into Alltel’s footprint, while U.S. Cellular has been busy recently realigning its core markets. Neither company would comment on their future plans.
