The deal of the century that died

Tomorrow, AT&T will begin reaping the rewards of that collapse, as shareholders vote to approve the long distance company's merger with TCI. If shareholders and federal regulators give the green light, the deal could be AT&T's best bet for battling Bell Atlantic and other Baby Bells on their own home turf.

A combination of shareholder skepticism, regulatory setbacks, and old-fashioned corporate culture clashes helped dissolve Bell Atlantic's TCI deal in 1994--hurdles that AT&T has also faced. But analysts and some of those who were close to the Bell Atlantic proposal say the long distance giant has a better chance of making a deal work this time around.

The original Bell Atlantic/TCI deal was announced in October 1993, and was followed by a joint media blitz by Bell Atlantic chief executive Ray Smith and TCI CEO John Malone. Valued at close to $33 billion, the deal would have been the largest communications merger in U.S. history.

More importantly, the merger would have catapulted the telephone company out of the regulated world of utilities into the more glamorous world of interactive television.

Some say Bell Atlantic was simply star-struck. Former chief executive Smith, a one-time actor with a love for the big screen, saw the deal as a way to bring his company to the forefront of the developing interactive medium.

Like AT&T, the Bell planned to use TCI's cable for the more prosaic purpose of expanding into new local telephone markets. But Smith and Malone spent far more time touting the prospects of interactive television. Bell Atlantic already was running a trial interactive TV version using asymmetric digital subscriber lines (ADSL) called "Stargazer."

But the proposed deal started cracking almost as soon as the corporate honeymoon's first glow started to dim.

Corporate shooting star
Bell Atlantic's stock started dropping after news of the agreement, losing more than 22 percent over four months. Three self-imposed deadlines for signing definitive terms for the deal came and went in the early days of 1994.

Finally, a decision by the Federal Communications Commission unbalanced the already shaky deal. In February of 1994, regulators voted to roll back and cap cable rates, slashing TCI's cash flow by an estimated $1.8 billion a year. Since the original merger price had been based on TCI's annual revenue, the FCC decision threw a wrench into the works.

"Things had been going south for a while," says Eric Rabe, Bell Atlantic's vice president of communications, who was close to the deal at the time. "It took a while to realize that. But when it became apparent that it wasn't a good deal, then it was a five-minute decision."

The merger that was to create the future of communications was dissolved in moments, Rabe said. "Everyone sat down around the table, and [TCI CEO] John Malone said, 'You can't pay what I'm asking, and I can't settle for less for my shareholders. So let's go to lunch.'"

The problems ultimately went deeper than the economics of cable rates, however.

Some say that Bell Atlantic realized that simply buying TCI would not make delivering interactive television--or even their own business of local telephone service--much easier.

"They just saw that's very hard to get something like that up and running," said a TCI executive who was close to the deal at the time.

Many observers, including Malone--in several acerbic interviews following the collapse--said Bell Atlantic was unwilling to take on dramatic new risks.

TCI's shareholders were used to growth, while Bell Atlantic's shareholders were interested in stability and dividends, notes Rabe. Undermining the Baby Bell's historical stability would have been "intolerable" to shareholders, he said.

But these shareholder concerns highlighted even more basic differences in corporate culture, and in the visions of two very aggressive, notoriously ego-driven CEOs.

"If these companies really wanted to make it work, they would have," says Brian Adamik, a senior telecommunications analyst with the Yankee Group. "More than anything there was a cultural clash between Smith and Malone. They had differing views on world domination."

Is AT&T a different story?
Many of the same hurdles remain in front of AT&T and TCI's pending merger, although the two companies already have covered more ground than the Bell Atlantic deal ever did.

AT&T chairman Michael Armstrong and Malone have the potential for the same kind of ego and culture clashes that helped kill the Bell Atlantic deal. But analysts say the relationship has already proven to be more flexible than its 1994 counterpart.

"What Armstrong and Malone have been able to do is say that there are going to be ambiguities in their business, and they're going to live with them," Adamik said. "I think Armstrong and Malone already have a deep respect for each other and for what they're both trying to accomplish."

Perhaps more critically, observers say the companies need each other more than Bell Atlantic and TCI did in 1994.

As the Bell companies prepare to enter the long distance market, AT&T needs a way into the local markets to compete, analysts say. TCI's network--along with arrangements with other cable firms--gives the company a connection into subscribers' households without going through the Baby Bells' networks.

"AT&T is now in a more desperate situation than Bell Atlantic was in those days," Rabe said. "They're facing substantial erosion of their business."

AT&T's strategy, which will bring it into cable-based telephony and high-speed Internet access by the end of this year, is more clear than Bell Atlantic's vision, others note.

"[Bell Atlantic's] goal was not as clearly defined as AT&T's goal," said Bruce Leichtman, director of media and entertainment strategies for The Yankee Group. "The plan to offer local voice outside their region was one plan. The lure of interactive TV was another to a large degree. But the formula is not at all the same as AT&T's."

Leichtman points out that the industry had its doubts about AT&T's plan to purchase TCI when the $48 billion deal was announced last year.

"The purpose seems much more defined now," Leichtman said. "But eight months ago everyone was questioning why they were buying TCI. As people have had time to reflect on this deal, the thumb has turned from down to up."

Tomorrow's shareholder vote will bring the AT&T/TCI marriage just a single step away from completion. The Federal Communications Commission still must give its approval--but that is expected any day.

"I don't see anything getting in the way," said Adamik. "More than any of the big telco mergers, this is the one that reeks of consumer benefit."