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Monday, March 06, 2006

AT&T and BellSouth: Didn't see that coming

But I guess that I should have. AT&T is buying BellSouth.

The heart of this deal is the Cingular problem. AT&T owns 60% of the Cingular assets and BellSouth 40%, but they have 50/50 control of Cingular. When one thinks about how the wireless network assets will be used in the future, especially as new technologies that enable fixed-mobile convergence enter the market, the inability to do anything with the Cingular assets without BellSouth's approval was always going to hinder AT&T's agility (such as it is) in the market. Wireless assets will become more startegic over the next few years and will see slower revenue erosion as well. So AT&T had to get control of Cingular, and this is probably the best way to do it.

On the other hand, the non-wireless BellSouth assets create problems as well. BellSouth has long been a slower mover in the telecom marketplace (a follower in pretty much every product category), and they are probably seeing proportionally more of a decline in revenues than Verizon, AT&T, or Qwest for voice. On the other hand, they haven't begun to invest in fiber to the home nearly as heavily as Verizon of AT&T, so they have not yet committed themselves to the massive destruction of shareholder value that results from FTTH. If this deal goes through, though, they'll be committed to that path. This probably means that AT&T will be required to invest even larger amounts in FTTH, as it will cover an even larger portion of the country than before. On the other hand, the BellSouth territory is at least as densly populated as AT&T territory, and includes fast-growing Florida, Georgia, North Carolina, Tennessee-- four of the top ten states in population growth for the year ending in July 2005. AT&T territory already includes Texas, California, and Nevada, meaning that the new company would benefit from having it's territory include 7 of the top 10 states by population growth. The problem with this is that it requires investment of capital in infrastructure today (to serve these growing populations) which very well may not be supported by the revenue streams of the future, especially if prices continue to decline in key voice and data segments.

This deal is bad news for Lucent and Nortel, since it will shrink their universe of customers by one very large customer. Telcordia (recently sold by SAIC and currently owned by Warburg Pincus and Providence Equity Partners) will probably lose some of their current business with BellSouth.

Bad news also for Atlanta, where AT&T will reduce headquarters staff for BellSouth. Operational staff will be more difficult to cut, but if you work in marketing or finance, time to start looking over that resume. Cingular wireless is headquartered in Atlanta, and you've got to think that most of those jobs will move or be eliminated.

Of course, all this assumes that the deal will be approved, and it will take a long time to close this deal-- currently expected to close "next year."

One thing that always makes me shake my head and wonder what is going on is the slavish love of the AT&T brand. AT&T (nee SBC) has announced that at the completion of the deal, not only will BellSouth come under the AT&T brand, but Cingular will be re-branded as AT&T. Of course, this is after AT&T Wireless was re-branded as Cingular when Cingular bought AT&T Wireless. I guess that shareholders won't want all those billions used to re-brand back. I just don't see that value in the AT&T brand-- I see AT&T as hated phone company with a reputation that might have been good once, but that has been tarnished by years of obvious mis-management and incompetence. My guess is that Whitacre and Ackerman, who both started their careers at AT&T before the breakup (although their official bios say that they started at Southwestern Bell and BellSouth, we must remember that they were part of AT&T before 1984). Seems like there is a bit of a "let's put this thing back together, no matter how little sense it makes" thing going on there. As a friend noted, the idea is: "Lemme prove I have a big dick by putting AT&T back together", whilst Google is hanging nearby with a machete, waiting to chop that member off.

Whitacre and Ackerman will retire and ride off intot the sunset feted by some for rebuilding AT&T. Their successors may not be as happy though.


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