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AirTouch bidding war deflates Internet hype

Internet IPOs and mergers have made millions for investors, but the ongoing bidding war over AirTouch dwarfs even front-page deals like the $4.2 billion Netscape-AOL merger.

It's time for a reality check for the starry-eyed Internet sector.

Internet IPOs and mergers have made millions of dollars for investors in the last several years. But the ongoing bidding war over AirTouch Communications, the San Francisco-based cellular company that went public over four years ago, dwarfs even front-page deals like the $4.2 billion Netscape-America Online merger.

The comparison is strained in some respects. AirTouch was created from the Pacific Telesis Group's existing cellular business, taking what many observers have called the crown jewels of the telephone company's business. The Internet companies--and indeed the sector itself--are much newer, created essentially from scratch without a list of tangible assets.

But today's AirTouch barely resembles PacTel's original bequest. Company executives took a modest West coast cellular operation and transformed it over four years into the biggest mobile phone company in the world, with a market valuation of between $45 billion and $55 billion. This week's various bids for the firm even far surpass the $16.7 billion paid for its one-time parent company when it was sold in 1996.

The company's rise is proof that the Internet's wild market ride is not unique, and can even be outstripped by companies that are just as young in more mature sectors, such as the phone industry.

Equal and opposite reactions
AirTouch was spun out of Pacific Telesis in 1994, after company executives decided to separate the Baby Bell's cellular and traditional telephone operations. The cellular branch went public as a separate company on April Fools' day of that year, with a $10 billion valuation.

In retrospect, the cellular business proved to be some the of Baby Bells' most valuable assets, and many analysts say the deal weakened Pacific Telesis enough to make it vulnerable to its eventual takeover by SBC Communications.

"Pacific Telesis Group's [traditional] telephone assets faced one of the most difficult regulatory environments in the country, and the bulk of senior management went with [CEO] Sam Ginn to AirTouch," said ING Baring Furman Selz financial analyst Fred Moran. "It left Pacific Telesis ripe for a takeover."

The structure of the spin-off also gave AirTouch a boost in its new industry, say those who were close to the deal.

"What people often forget is that AirTouch was spun off debt-free," noted one former Pacific Bell employee. "All the debt went back to Pacific Bell." This debt didn't contribute to weakening the Baby Bell, the former insider said, but did help the new cellular operation take off from a running start.

From spin-off to sell-off?
Ginn made good use of that running start, analysts say. The CEO promised to double the stock's value inside of four years. After a slow start, he has more than delivered on that promise, quadrupling the company's market capitalization in that time.

The company's success has come through an aggressive expansion across the United States, where the company now has a mobile presence in 30 states. Additionally, the company made early strides into the rapidly-growing international markets, analysts say.

"Their success can be attributed largely to Sam Ginn's success in Western European markets, where growth has been close to 100 percent," said Moran. AirTouch has investments in 12 foreign countries, with operations in some of the most rapidly growing European markets.

The company said it had 4.9 million international subscribers overseas, along with its 7.8 million U.S. cellular subscribers and 3.3 million paging customers, at the close of the third quarter. Analysts estimate that the company has grown to more than 17 million subscribers worldwide by the end of 1998, easily making it the largest mobile phone company worldwide.

AirTouch now is poised to fill out nearly any company's telecom portfolio, and may be a good match with any of the three companies who have now expressed interest.

Bell Atlantic, with which AirTouch already shares joint ownership of PrimeCo, a PCS (personal communications service) company, wants to create a national U.S. wireless footprint. If combined with the Baby Bell's East coast-based mobile operations, the AirTouch subscriber base could be expanded from coast to coast.

Britain's Vodafone Group is aggressively expanding on the European continent, and has invested alongside AirTouch in several overseas ventures. Joining the two companies' operations would create a network that spans Europe, and would give Vodafone a valuable presence in the U.S. and Asian markets.

MCI WorldCom has created a valuable international end-to-end phone network, but lacks a wireless strategy. Chairman Bernard Ebbers has said in the past that he prefers to concentrate on land phone lines, but many analysts have said the company should have a wireless component if it is to compete with the world's other full-service telecommunications giants.

The fruits of success
Whatever the outcome, analysts say the bidding war was a predictable--and very beneficial--outcome for the original Pacific Telesis stockholder, who received a share of both companies at the time of the 1994 spin-off.

"Both were set up to be bought out," Moran said. "But there's no doubt that the separation was a major positive for all Pacific Telesis shareholders. Those that held on to both have been handsomely rewarded."

Chief among the stockholders benefiting will be CEO Ginn, who stands to make close to $150 million from cashing in on his own stock options and personal shares. The company's financial filings show that Ginn has accrued more than 2.3 million stock options since taking the company public in 1994, with exercise prices ranging from $20.375 to $52.725. The outstanding bids for the company now range in the mid-$90 per share range.

The bidding war has sparked some concern in non-shareholder circles, however. The city of San Francisco, which lost Pacific Bell's corporate headquarters when the company was bought by SBC Communications in 1996, is now loath to lose another high-profile firm.

"We do take the position that we will do whatever we can do to keep them here," said Ron Vinson, deputy press secretary for San Francisco mayor Willie Brown.