Ghost of Ma Bell in proposed merger

AT&T bids $67-billion for a former Baby Bell, BellSouth. The company's power today would lie in the Internet.

Associated Press
Published March 6, 2006

NEW YORK - Call it a well-funded family reunion: If AT&T Inc.'s $67-billion bid for its BellSouth Corp. is approved, it will go a long way toward reversing the breakup of the old Ma Bell monopoly 22 years ago.

The proposed purchase, announced Sunday, would create a new AT&T that would be the local phone company in a 22-state territory, and a behemoth in wireless, long-haul voice and Internet traffic, and phone directories.

Together, the three companies employ more than 316,000 people.

The deal appears to be the largest yet among U.S. telecom players.

In 1999, MCI WorldCom Inc. agreed to buy Sprint Corp. for an even larger sum, $115-billion, but that deal was blocked by federal regulators.

Internationally, Britain's Vodafone Airtouch PLC paid $180-billion in stock for Mannesmann AG of Germany in 2000.

The new company would operate under the AT&T brand, which SBC took over with its acquisition of AT&T Corp. in November. After spending millions of dollars to rebrand AT&T Wireless Services Inc. stores as Cingular stores and hundreds of millions of dollars more on marketing the new Cingular after its $41-billion acquisition of AT&T Wireless in October 2004, Cingular would now become AT&T if the merger with BellSouth is completed.

The BellSouth name also would be absorbed in the deal.

"It's going to be confusing," said industry analyst Jeff Kagan. "This is the reinvention of the telecommunications industry."

AT&T will pay 1.325 of its own shares for each BellSouth share. Based on Friday's closing price of $27.99 for AT&T shares, that works out to be $37.09 for each BellSouth share, an 18 percent premium from the Friday closing price of $31.46 for the company.

AT&T expects the acquisition to save it $2-billion annually, starting the year after the deal closes. About half of the savings would come from reduced advertising expenses and from combining their work forces.

The choice of AT&T as the common name is a reminder that many Americans look back affectionately on the days of the Ma Bell monopoly, and the new company will have the scale to make that association more than just a marketing ploy.

With roots stretching to 1885, the American Telephone and Telegraph Company was split by the government in 1984 into eight regional Bell companies and a long-distance and equipment company that retained the AT&T name.

The Telecommunications Act of 1996 partly deregulated the industry, enabling a rapid reconsolidation.

Southwestern Bell, later SBC, proved to be the most aggressive of the Baby Bells. Under Chief Executive Ed Whitacre Jr., it quickly snapped up its siblings Pacific Telesis and Ameritech, in addition to Southern New England Telecommunications.

There was even talk in 1997 of SBC buying AT&T, but that idea was shot down by the Federal Communications Commission as soon as it was mentioned in the media.

AT&T was at the time flailing somewhat for direction. In its main business, long distance, it was facing nascent competition from the Baby Bells, which were allowed entry into that domain by the Telecommunications Act - as long as they opened their local business to competition.

But it was much harder for AT&T to break into the local business than it was for the Baby Bells to sign customers up for long-distance. To get its own lines to homes, AT&T began buying up cable systems, but the massive debt it took later forced it to sell them off at a loss.

Since SBC was already too large to pass antitrust muster as a buyer of AT&T under the regulatory principles of the time, it fell to BellSouth to come to rescue the old head of the family. The companies were in advanced merger talks in 2001, but media leaks apparently gave BellSouth cold feet, and the deal was called off.

With progressively looser regulation, more options opened up for the Bells, and last year, SBC finally did acquire AT&T.

While regulatory approval for the new AT&T's takeover of BellSouth is not a given, it would appear to stand a healthy chance of passing antitrust scrutiny.

But does that really mean it will have the clout of the old nationwide Bell system?

Not really. The reason regulators have looked more and more leniently on consolidation among telephone companies is that they're no longer the only way to place a phone call.

For example, the number of U.S. subscribers to Internet and cable telephony more than tripled last year to 4.5-million, according to analysis firm TeleGeography. That's far less than the 130-million or so phone lines in operation, but that number shrinks by a few percent each year.

Consumers are also ditching their fixed phone lines for cellular phones. In that competitive industry, the AT&T-BellSouth linkup wouldn't change the dynamics, since they're already partners in Cingular Wireless. The merger would merely give AT&T full control of the joint venture.

The combined AT&T and BellSouth would be the country's largest supplier of broadband Internet access. Their combined 9.8-million DSL lines (at the end of last year) would vault them past the current leader, cable company Comcast Corp., with 8.5-million broadband subscribers.

The company will also be one of the largest backbone Internet carriers, a network it acquired with AT&T Corp.

The toughest resistance to the merger could come because of the combined company's Internet clout, and this may be where it will have to make concessions.

AT&T is already involved in a vehement debate over the future of the Internet. Along with the other major backbone carrier, Verizon, AT&T wants to explore the creation of a "toll lane" on the Internet, in effect charging content providers like Google extra for guaranteed speedy delivery past the traffic jams of the public Internet.

The idea has raised the hackles not only of Google but of consumer groups who see equal treatment of traffic as a cornerstone principle of the Internet.

"They are sadly mistaken if they believe there won't be intense opposition to this deal from all those who care for the Internet's democratic and competitive future," said Jeff Chester at the Center for Digital Democracy in Washington.

If Ma Bell is indeed back, it's a Ma Bell of the Internet age, with very different issues to face than when she was last around.