SBC Communications Inc. and Ameritech Corp. last week announced a stock-for-stock merger agreement valued at about $62 billion that would give the combined company a local and wireless presence in the West, Southwest, Midwest and parts of the Northeast.
The companies seemed to place an emphasis on the landline aspect of the merger, which reportedly would make it the largest local telephone company in the United States.
But a combined SBC/Ameritech also would rival AT&T Wireless Services Inc. for the top rank among wireless carriers, with SBC controlling 8.4 million wireless subscribers. AT&T reported 8.2 million wireless carriers at the end of last year.
“The planned merger, although driven by the need for a national presence in the landline telecom market, will have significant impact on the U.S. wireless industry,” said David Kerr, director of mobile communications services at Strategy Analytics. Kerr said the merger would mean further concentration of market power with the top six operators controlling 70 percent of subscribers.
If combined, the company would have to sell some of its wireless interests, primarily Chicago and St. Louis, where both companies own cellular properties. Federal Communications Commission spectrum-cap rules prevent carriers from owning more than 45 megahertz of spectrum in each market. The Chicago cellular market is the third-largest cellular market in the country with about 1.76 million customers and is likely to fetch a high price from potential buyers, said analysts.
The combined company also would have to straighten out its digital wireless position. SBC and Ameritech today have networks operating with all three digital standards-Ameritech with Code Division Multiple Access, SBC with Time Division Multiple Access and Pacific Telesis with Global System for Mobile communications networks.
SBC acquired Pacific Telesis Group last year in one of two mergers that married Baby Bells. The other was the merger of Bell Atlantic Corp. and Nynex Corp. SBC earlier this year also announced a merger agreement with Southern New England Telecommunications Corp.
Edward E. Whitacre Jr., chairman and chief executive officer of SBC, insisted the deal will create competition and “is not like putting the Bell system back together.” However, only four of the original seven Baby Bells would remain if the merger is completed-SBC, U S West Inc., BellSouth Corp. and Bell Atlantic Corp.
Under terms of the deal, Ameritech shareholders would receive a fixed exchange ratio of 1.316 SBC shares for each share of Ameritech. The transaction would be a tax-free, stock-for-stock exchange accounted for as a pooling of interests. A provision of the merger agreement prevents Ameritech from soliciting other potential buyers.
The combined company would be called SBC, with Whitacre remaining chairman and CEO of SBC and Richard Notebaert remaining chairman and CEO of the Ameritech division.
Early indications suggest many telecommunications industry watchers feel the transaction would not promote competition, and some analysts said there are mixed opinions about whether the deal ultimately will be approved.
However, some analysts suggest SBC wouldn’t have made public the merger announcement unless it had some assurances the deal would go through.
“I think it will be more painful than they think,” to get the deal past FCC and antitrust scrutiny, said Patricia Martin, director of Decision Resources Inc.
Perry Walter, a telecom analyst at Robinson-Humphrey Co., said the merger is part of a continuing trend of tie-ups, which began with M&A activity within telecommunications sectors and now is moving toward larger telecom companies buying properties within specific telecom sectors. Walter said a third level of M&A activity will emerge that will include international telecom companies.
Martin said approval of the SBC/Ameritech deal would make it difficult for the FCC and Justice to block another huge marriage of Baby Bells. If the deal is approved, Martin said Bell Atlantic would almost have to merge with BellSouth in order to stay competitive, although she said BellSouth hasn’t shown signs of being for sale.
If SBC is to be successful at making itself a global player, its streak of acquisitions won’t be over.
While the combined company completely surrounds U S West, Martin said without wireless and with such a far-flung landline territory, SBC most likely would not be interested in acquiring it. In addition, the tax-free status of U S West’s split into separate entities reportedly would be lost if it merged or was taken over by another company within the next two years.
“The first primo available candidate is Sprint,” said Martin. “Although it doesn’t make [SBC’s] mismatch of technologies any better.” Sprint Corp. has implied that it is available, although its official stance is that it is not for sale, said Martin.
The ever-shortening list of acquisition candidates also may have boosted GTE Corp.’s value on the auction block.
The question of whether the two companies’ corporate cultures will mesh also raised a few eyebrows following the announcement.
“I find that a very strange marriage,” said Martin, who called Ameritech the training ground for straight-laced, by-the-book Bell-heads, while comparing SBC to outlaws. Martin said if combined, SBC most likely would allow the “Bell-shaped” employees to leave and install SBC employees in their place.
“There’s no way Ameritech can continue to be bell-shaped and straight-laced and be part of SBC,” she said.
