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1/31/2005
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SBC To Buy AT&T For $16 Billion

The deal, which combines a large regional phone company with the nation's largest supplier of business-communications networks, could kick off more mergers.

SBC Communications Inc. revealed an agreement Monday to buy AT&T for $16 billion, combining one of the country's largest regional telecommunications companies with the nation's largest supplier of business-communications networks. The deal also reunites two former members of the Bell System and creates a telecommunications powerhouse that can provide a range of services, including local, national, and international wired and wireless voice and data services.

Analysts speculate the acquisition may set off a wave of similar moves by other regional Bell companies such as BellSouth, Verizon, and Qwest, which may seek to acquire AT&T competitors MCI or Sprint to better compete with SBC for business customers.

"Today's agreement is a huge step forward in our efforts to build a company that will lead an American communications revolution in the 21st century," Edward Whitacre Jr., SBC's chairman and CEO, said in a statement. "We are combining AT&T's national and global networks and expertise with SBC's strong platforms and skills in local exchange service, wireless, and broadband. It's a great combination."

SBC has more than 50 million customers, including 5.1 million broadband DSL customers, and owns 60% of Cingular Wireless, which has 49 million subscribers. AT&T provides services to many large businesses on a global IP network with nodes in more than 130 cities in 50 countries. It has 26 Internet data centers, including 13 outside the United States. It handles more than 300 million long-distance voice calls a day and carries around 4 petabytes of data a day.

But AT&T has been struggling as intense competition, falling prices, and unfavorable regulatory decisions have caused the company to pull back from the consumer market. Last year it wrote off more than $11 billion in assets and cut around 12,000 jobs. Its revenue fell by more than 12% and the company predicted that revenue would continue to decline this year.

The deal may help prop up a declining AT&T, thanks to SBC's steady stream of revenue from the local services it provides to consumers and businesses in Arkansas, California, Connecticut, Illinois, Indiana, Kansas, Michigan, Missouri, Nevada, Ohio, Oklahoma, Texas, and Wisconsin.

The biggest change for business customers in the short term, says Dave Passmore, research director at the Burton Group, is that they may end up with new account reps. But it's not likely to have much affect on the network services that businesses rely on. "It actually might lend a little more stability to AT&T, which could be a good thing for enterprises," he says.

But at least one observer calls the deal a "dumb move." Buying AT&T, says Scott Cleland, CEO of analyst firm Precursor, would "devastate" SBC's ability to grow, and completely reverse the great progress they've made in tilting their business to wireless and growth." Basic long-distance service "is the weakest and worst segment to invest in in all of telecom," he says.

It's SBC's ambition to be a major player in the national and international market for business networks that led to the deal, counters Burton Group's Passmore. "It's a game of chicken," he says. "As AT&T's and MCI's revenues continue to shrink and their stock prices decline, they become an attractive takeover candidate. If SBC wants to be a global player and sell to large enterprises, the price becomes attractive."

SBC and AT&T said the deal will generate $15 billion in "synergies" that come from cuts and increased operational efficiencies as well as increasing revenue, with 25% coming from combining business-services organizations and another 10% to 15% from elimination of duplicate corporate functions. The companies said another 10% to 15% will come from increased revenue as the combined company sells more services to existing customers. SBC has around 165,000 employees and a market cap of $78.3 billion. AT&T, which once owned the companies that make up SBC, has around 47,500 employees and a market cap of $15.7 billion.

Whitacre will serve as chairman and CEO and AT&T chairman and CEO David Dorman will serve as president and board member. Under terms disclosed Monday, AT&T shareholders will receive 0.77942 shares of SBC common stock and a special dividend of $1.30 per share. The deal, which is subject to regulatory review, is expected to close in the first half of 2006.

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