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Execs Explain SBC, AT&T Pairing

Light Reading
News Analysis
Light Reading
1/31/2005
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SBC Communications Inc. (NYSE: SBC) and AT&T Corp. (NYSE: T) today made it official: The two carriers will merge in a deal valued at around $16 billion. Senior executives from both companies say the merger will create a ”prototype for 21st century telecom companies.” (See SBC to Buy AT&T for $16B.) The deal represents a huge and much-needed consolidation for carriers, and analysts say it will lead to similar moves by competing carriers (see SBC/AT&T Could Ignite M&A Frenzy and SBC/AT&T: Possible Winners & Losers).

While the two companies have explored the possibility of pairing up over the years, AT&T chairman and CEO Dave Dorman says his company saw the merger as an opportunity to accelerate its growth and transformation by pairing with SBC. “With our step back from the consumer market to focus on enterprise services, AT&T is a very complementary partner for SBC,” he said in a morning conference call. “It’s a hand-in-glove partnership.”

But others have a different view. Given AT&T's troubles of late, many see the deal signaling that AT&T knew it doesn’t have the cards to compete and decided to fold before the pot got too big. Indeed, the terms of the deal do not give AT&T investors a premium price. “On its own, AT&T had a much more challenging future,” says Legg Mason Inc. telecom analyst Brad Wilson. “The benefit for AT&T investors from this deal is that they have a future.”

The deal will indeed have a major financial impact on both the companies, although investors will have to wait until 2008 to see the combined carrier turn a profit. The combined company predicts it will be free cashflow positive in 2007 and earnings per share (EPS) positive in 2008. SBC says the duo will have an annual revenue run rate of almost $2 billion in 2008, growing to more than $3 billion by 2011.

AT&T's shares fell $0.59 (2.99%) to $19.12 in late afternoon trading on Monday. SBC's shares went the other way; they rose $0.11 (0.47%) to $23.73.

The companies say that their complementary networks will provide a solid foundation for integrated services that includes a global IP backbone, local access, broadband access, and a nationwide wireless network (see SBC/AT&T Cheat Sheet).

But there will be some overlap as well. The companies plan to combine all aspects of their businesses, which will lead to some layoffs and facility combinations. The two carriers say their network centers, local switches, and field sales forces will be combined. There will also be consolidation around network planning and engineering functions. However, no immediate layoff estimates were given by the companies.

”The thing that jumps out at me about this deal is the amount of cost savings that will take place across the board,” says Stan Hubbard, senior analyst at Heavy Reading. “They’re predicting $15 billion in savings through cost reductions and revenue growth.” Hubbard notes that the companies expect 85 percent of the synergies to come from cost reductions by eliminating duplicate facilities and streamlining business processes and organizations.

The pairing will also give AT&T an opportunity to get some major traffic on its IP network. “They’re finally going to have an opportunity to put a lot of traffic on their intelligent network,” Hubbard says. Hubbard says that’s bad news for WilTel Communications Group Inc., the carrier currently providing SBC's IP services.

AT&T’s CallVantage VOIP offering is another ripe fruit that fits in well with SBC’s Project Lightspeed, which aims to offer video and voice services to 18 million customers by 2007 (see SBC Sheds Light on 'Lightspeed'). SBC chairman and CEO Edward Whitacre says that AT&T’s VOIP offering was an appealing part of the deal. “We hope we can roll our existing VOIP programs into what they have as quickly as possible,” he says. Such a move is a big win for SBC, whose VOIP offering is scheduled to roll out to consumers next month.

“What this does is accelerate our ability to migrate to IP in the local platform,” says SBC COO Randall Stephenson. “In terms of Lightspeed, this is probably one of the most exciting parts about this deal. Obviously when you start moving video and high-speed data by the volumes we’re talking about in deploying Lightspeed, the kind of backbone capacity that AT&T brings to bear is really exciting.”

An AT&T/SBC pairing is anything but a done deal, as the companies must get regulatory approval from the Antitrust Division of the U.S. Department of Justice, the Federal Communications Commission (FCC), and as many as 28 states. “I think there is a good chance this deal gets done,” says Heavy Reading’s Hubbard. “Part of it depends on who will be the new FCC chairman and how market-friendly he or she is." (See Chairman Powell to Step Down.)

Legg Mason’s Wilson also believes the merger will happen, but says it might take longer than the 17 months the companies estimate. “It’s probably more likely to take 18 months,” he says. “The key issue is how bad the states involved muck up the process.” He also thinks AT&T might have to divest some of its small business operations before the deal gets approval.

SBC’s Whitacre says the AT&T name will stick around in some capacity, possibly as the company’s business arm. “AT&T is an American icon,” he says, "and we plan on allowing it to continue as we move forward. Some may think it’s ironic that a Baby Bell is acquiring its parent, but it’s the right move. It’s good for shareholders, customers, and employees.”

One issue still to be resolved has to do with SBC’s investment in Cingular Wireless, which it holds in partnership with BellSouth Corp. (NYSE: BLS). Many observers see this as a major conflict brewing, but SBC downplayed those concerns with folksy reassurances in lieu of real proof. "This deal will be real good for Cingular,” Whitacre says. “This is the best deal at this time. I don't think that the relationship [with BellSouth] will be soured."

Looking ahead, the combined SBC/AT&T intends to focus on increasing revenues through higher-growth segments like VOIP, IP VPN, Ethernet, and network management. By acquiring AT&T, SBC will gain enterprise expertise and AT&T’s nationwide network, which will allow it to expand its enterprise base and eliminate costs. “Our local and global assets complement each other,” says AT&T’s Dorman. “Companies who invest in all local or long-haul access don’t take into consideration what consumers want.”

“In terms of size, this deal is not the largest I’ve been involved with,” Whitacre adds. “But it certainly is the most important for the future of the telecommunications industry.”

— Chris Somerville, Senior Editor, Next-Generation Services

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OldPOTS
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OldPOTS,
User Rank: Light Beer
12/5/2012 | 3:28:02 AM
re: Execs Explain SBC, AT&T Pairing
The quote "Obviously when you start moving video and high-speed data by the volumes weGÇÖre talking about in deploying Lightspeed, (and enterprizes) the kind of backbone capacity that AT&T brings to bear is really exciting.GÇ¥

Now Williams capacity becomes available for the others' freaking longhaul networks. This helps some early deployers. The cablecos obviously have the video, but will need this capacity for VoIP.

If you assume higher speed DSL and FTTU fast roll out with triple play, then SBC can strike quickly as they now have longhaul network Capacity.

They know how to easily upgrade DSL and they have had a small FTTH access trial for a few years. SBC is now behind in the triple play application scaling/rollout capabilities, but probably ahead of most US competitors, except cablecos.

OldPOTS
aswath
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aswath,
User Rank: Light Beer
12/5/2012 | 3:28:01 AM
re: Execs Explain SBC, AT&T Pairing
Msg. #9: ... one that prioritizes voice traffic from the best effort data ...

Skype is universally being praised for good voice quality, even though it uses best effort network. Given that why do you think we need a common carrier who prioritize voice traffic?
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 3:28:00 AM
re: Execs Explain SBC, AT&T Pairing

I want to correct a factual error made below that AT&T was shut out of the local loop.

What was deleted was UNE-P which was the ability to rent both switch and loop capacity. UNE-L which allows AT&T to rent the local loop alone still exists. Also, AT&T owned a cable company and decided to sell it. If it had not done so, it would have had a local loop alternative for any of its services.

Also anytime anyone wants to build a network they are quite welcome to. The overbuilder market exists and many companies are profitable doing so.

In fact, AT&T, MCI and Sprint LD own plenty of plant to their major business customers. Which is where the money lies for these firms anyway. The whole point of this deal will be to allow SBC to win in the Enterprise space.

seven
keelhaul42
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keelhaul42,
User Rank: Light Beer
12/5/2012 | 3:27:59 AM
re: Execs Explain SBC, AT&T Pairing
OldPots:
They know how to easily upgrade DSL and they have had a small FTTH access trial for a few years. SBC is now behind in the triple play application scaling/rollout capabilities, but probably ahead of most US competitors, except cablecos.
>>>>>>>>>>>>>>>>>
Who do you know who is working with "triple Play" besides cablecos and RBOCS? ( I say RBOCS lightly because I don't think they intend to follow through after the pilot projects.)
I've heard talk of wireless networks but not seen or heard of actual deployment.
Anything in your area?

thx,

-kh
fgoldstein
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fgoldstein,
User Rank: Light Sabre
12/5/2012 | 3:27:59 AM
re: Execs Explain SBC, AT&T Pairing
> Skype is universally being praised for good voice quality, even though it uses best effort network. Given that why do you think we need a common carrier who prioritize voice traffic?

The laws of physics still apply. Skype performance depends on the intevening networks. Sometimes good, sometimes not. "Universally" is a bit strong, because any non-prioritized VoIP can suck when the link is congested. No way around it.
PO
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PO,
User Rank: Light Beer
12/5/2012 | 3:27:58 AM
re: Execs Explain SBC, AT&T Pairing
Two dinosaurs mating will not a VoIP powerhouse make.

I'd expect SBC to press VOIP out-of-region - that is, in those areas of the country where they are not the incumbent copper plant owner. The AT&T deal gives them an immediate national presence to advance that agenda.

In-region, they can offer it as a defensive play against competitor's offerings, but as the ILEC their cost structure would presumably be better on traditional technologies.

The question, IMHO, is to what extent a DSL offering can be separated from the voice services offering. That is, to what extent can you buy DSL without buying voice from that same carrier?
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 3:27:57 AM
re: Execs Explain SBC, AT&T Pairing
I'd expect SBC to press VOIP out-of-region - that is, in those areas of the country where they are not the incumbent copper plant owner.

Regulators expected the RBOCs to compete out-of-region with the UNE-P rules as well. It never happened. Why would VoIP be any different?
allidia
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allidia,
User Rank: Light Beer
12/5/2012 | 3:27:56 AM
re: Execs Explain SBC, AT&T Pairing
will use AT+T VOIP solution (SONS). This appears to be a major win for Sonus and another disappointment for NT. I'm a little surprised because NT is known to give their product away. Must be those rumored ECHO issues at VZ. I guess the next question is how much is SONS worth to Alcatel or maybe even Cisco? It would appear that they are the defacto standard for T/SBC/ and most likely Cingular when it comes to Carrier class VOIP.
paolo.franzoi
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paolo.franzoi,
User Rank: Light Sabre
12/5/2012 | 3:27:56 AM
re: Execs Explain SBC, AT&T Pairing

First off, there was some competition in out of region.

Second, I think unless you have all lost it you have forgotten the rule of money around communications. Residential Service was subsidized by Business Service. Now we have changed the rate structure so this is not true anymore, but the high margin piece of the market is in Enterprise services. Frankly, consumer services have always been more a mile wide, inch deep (in terms of margin) service. So, I would expect a lot of profit from out of region VoIP.

Third, the only reason SBC would do it would be to amortize the expense of their network. If they have an AT&T site in say Atlanta and they can for no additional capital offer VoIP to residences in Atlanta then this is a good deal. It raises volume on the network which in turn lowers the cost per bit/second of the network. Most existing out of region businesses simply don't justify the expenditure of capital.

Finally, fgoldstein is probably ready to type "so that is why we need UNE-P". My problem with UNE-P is that it never justified the expenditure of capital under any circumstances. From an CLEC's standpoint, you took money out of your enemies' pocket and you could use it to invest in other things. If there was a way to say, you can have UNE-P for 1 year and then you are required to put in your switches after 1 year or be heavily fined, then I could agree to it. But to subsidize a company with no need to add value to the economy just makes no sense. If you can make a business case to invest in a switch and want to compete early fine. But to take money out of one pocket to place in another pocket is called robbery.

seven
prefer_to_lurk
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prefer_to_lurk,
User Rank: Light Beer
12/5/2012 | 3:27:55 AM
re: Execs Explain SBC, AT&T Pairing
"I'm a little surprised because NT is known to give their product away. Must be those rumored ECHO issues at VZ."

Interesting... from what I've seen over the years, Sonus is the one with cutthroat pricing.

How much has T actually bought from Sonus ? They aren't listed among the 10%+ customers in the latest SONS 10-Q.

Similarly, it is rumored that several major accounts are actively evaluating competing vendors as they finish out their Sonus contracts. I guess it's hard to stay ahead of the big boys when your R&D budget is less than $40M per year...

ptl
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