ATT- Bellsouth

ATT- Bellsouth

ATT will take over Bellsouth in an announced $67bn deal.

The bag is impressive. In twenty years, the deregulation process has been partly reversed with four of the first seven Baby Bells again federated under the ATT umbrella. Successively, SBC, one of the RBOCs, bought Pacific Telesis, and Ameritech, then bought ATT Wireless and merged with ATT. Finally ATT/SBC decided to merge with Bellsouth and by the way will be the only owner of Cingular, a common JV with Bellsouth in cellular markets. The new company should be the market leader in wireline and wireless US markets. The new entity is expected to provide benefits to customers by combining various networks into a single, fully integrated wireless and wireline Internet Protocol (IP) network. Rationalization is the key word of the move. ATT expects that synergies from the combination will ramp quickly to $2bn a year and estimates the net present value of expected synergies at nearly $18bn. Furthermore, the move should speed the adoption of NG technology faster than each company could do alone.

What can be the impacts of the merger?

The first impact, already announced is on the workforce. The combined entity should have about 310-320,000 employees and ATT consider that 4% are redundant, meaning 10,000 jobs could be cut in next three years in addition to the 26,000 workers to be fired before the merger.

The second impact should be on the suppliers. ATT, being the dominant player, is likely to impose its strategy and vendor relationships. Vendors in place in ATT (Alcatel, Cisco, Nortel, Siemens, Motorola, Ciena, ) could each benefit if ATT extends its backbone upgrade into BellSouth territory. Bellsouth vendors (Tellabs, Redback) on the contrary should be badly hurt by the merger. The wireline networks of ATT and Bellsouth do not overlap, so analysts do not expect any capex reduction due to the merger.

Thirdly, the merger is far from rebuilding the previous Ma Bell system. The environment is very different from 1984. Now, competition is there with cable operators, ISPs, cellular operators, backbone operators, CLECs etc. ATT and Bellsouth are not actual competitors in the local, long distance and video markets, so the merger will not reduce competition in any of those markets.

Fourth, the proposed merger is unlikely to face any issue from the government, and an approval should be gained in the next twelve months.

Fifth, Consumers and Cable MSOs are the main opponents to the merger.

Consumers are anxious about the merger. They have the feeling their phone bill is not close to go down and that their choice should be limited to very few options. The cable industry is threatened by the size of the new company (with a capitalization greater than that of the entire cable industry), and of course by a powerful company asking for free license to enter the video market while maintaining all current regulation on a much smaller cable industry.

Sixth, WiFi could be another weapon of ATT. ATT runs one of the largest Wi-Fi networks in the US (FreedomLink), and combined with Cingular mobile services, it could be a winning bundle over Sprint Nextel, T-Mobile, and Verizon offers.