Telcos merge for survival

Grow or die.

That seems to be the motto of the telecommunications industry as its big guns--and even its smaller players--scramble to join forces, employing Darwinian practices in order to survive.

"Growth is obviously the end goal behind all this," said Doug Christopher, an analyst with Crowell Weedon. "It's likely that companies can do well in their own backyard. But you expand if you want those double-digit growth rates and want to keep from being taken over."

Indeed, there is a whole lot of taking over going on.

Since Congress passed the Telecommunications Act two years ago, merger mania has consumed the telecommunications industry, with long distance companies providing local service and local companies attempting to break into long distance markets. Meanwhile, many companies are offering the promise of all-in-one phone service and less expensive communications tools--including voice, mobile, paging, data, and Internet access.

The two latest examples are the GTE-Bell Atlantic deal announced today, and the proposed $10 billion partnership between AT&T and British Telecommunications.

George Reed-Dellinger, an analyst with HSBC Washington Analysis, describes the AT&T-BT transaction as "arguably the most strategically important deal ever announced," because the international business calling market is one of the fastest-growing profit centers within each company.

Telco giants increasingly are realizing that growth means branching out beyond the telephone.

Earlier this month, for example, AT&T announced that it would buy cable TV company Tele-Communications International, giving the phone giant the potential to provide telephony, video, and high-speed Internet access via cable in the future.

Consumer demand for such services, as well as the globalization of business in general, are driving the consolidation trend, analysts said.

"If you have 1,000 small, rural phone companies, they're not going to have the size or scope to provide services for large international and national customers. These companies want to combine assets to better provide those services," said Mel Marten, telecommunications analyst with Edward Jones. "While there are risks in any business venture, the risks for these companies are higher if they maintain the status quo."

Many of the telcos also are anxious to expand into portal services, Rooney said, noting the rumored buyout of America Online by AT&T.

"I see AT&T making a sizable acquisition in the Internet industry in the next three to six months," Rooney said. "The way [AT&T CEO]Michael Armstrong is going, no Internet company is safe."

Rooney said he thinks WorldCom also is poised to make an Internet play, after antitrust regulators required MCI Communications to sell its entire Internet division to Britain's Cable & Wireless as part of the deal to win approval for the MCI-WorldCom merger. (See related story)

"Obviously WorldCom has its hands full right now [with the MCI deal]," he said. "Once they clean up their debt and get it financed, then they'll go right back out on the acquisition trail."

But even as the end goal of most telcos is similar, their strategies for reaching that goal differ.

Crowell's Christopher said the AT&T-TCI merger will focus on "the high-speed broadband stuff yet to be implemented," effectively entering the combined company into new territory. Bell Atlantic, on the other hand, bought itself a ready-to-play partner when it chose to merge with GTE.

"GTE's system is already implemented," he said. "It has wireless services already, and pretty much a national footprint."

For many consumers and small businesses, the promise of all-in-one communications services and just one monthly bill is enticing, but analysts argued that it is lower-cost services, not the services themselves, that likely will win over the most customers.

"The one bill-type thing is a convenience. If the average person has all this stuff--the local phone, cellular, the pager--yes. It's wonderful for maybe the business person on the go," Christopher said. But "I think the real key is improving the affordability of these wireless services to the consumer and increasing the penetration to these markets."

When Congress deregulated the telecommunications industry, it seemed to herald the era of merger mania being seen today. But whether these recent mergers and those certain to come will pass regulatory muster remains to be seen.

The GTE-Bell Atlantic deal, for example, already is raising eyebrows.

"We believe the deal between Bell Atlantic and GTE currently would be illegal" because the regional Bells remain prohibited from offering long distance service within their local service areas, HSBC Washington Analysis' Reed-Dellinger said.

Added John Rooney, president of Hornblower & Weeks: "I don't see the GTE-Bell Atlantic deal working just because these companies are mirror images of each other. I think there'll be some antitrust issues there, so it'll be interesting to see how the regulators play it."