2HRS2GO: SBC shows creativity
A Baby Bell being creative? Times really have changed.
Major U.S. telecom players have been busy with massive M&A since Congress passed its much ballyhooed communications bill in 1996, but until now they've mostly been unimaginative acquisitions of peers (Baby Bells merging; MCI Worldcom (Nasdaq: WCOM), Qwest (Nasdaq: QWST) or Global Crossing (Nasdaq: GBLX) inhaling other communications giants) or predictable forays into growing markets (scooping up a wireless company).
The sole exception was AT&T (NYSE: T) buying TCI, and that deal mainly changes the delivery vehicle for services, rather than the services themselves. As far as the end user is concerned, a phone call is a phone call, whether over IP or traditional circuits. Internet access is Internet access, though the speeds may change.
Today's SBC Communications (NYSE: SBC) announcement marks a telecom provider's first large acquisition outside traditional communications markets. SBC wants to pay $3.9 billion for electronic business specialist, Sterling Commerce (NYSE: SE). Seems like an unusual marriage on the surface, but it makes a surprising amount of sense.
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Just about everyone in the communications space sees data transport as their future. Currently the data market is growing so rapidly that providers can generate strong growth just by feeding basic needs, but if you want to stand out in the end, you need to differentiate yourself somehow.
A company like MCI Worldcom can paint itself as a huge, global, end-to-end communications provider. That's a tougher proposition for someone like SBC. Even if SBC is a giant, it's still viewed as a regional giant, although it has some international presence.
Buying Sterling, with its e-business software and Web-based marketplaces, gives SBC a bigger package. SBC can offer not just a network, but something that makes it useful.
From Sterling's perspective, it's an easy choice. SE hasn't traded above 36 since early July and has been sliding since regaining that level last week, so a price of $44.25 doesn't look so bad. An all-cash offer -- for once, having a tepid Baby Bell stock turned out to be an advantage -- makes the deal even more appealing for SE shareholders who get a guaranteed price, and for SBC shareholders who don't have to fear massive share dilution.
And they don't have to worry about EPS hits either. Buying Sterling will be "slightly dilutive" on face value, but the company expects a combination of cost savings and added cash from the acquired operations to balance that out, said Steve McGaw, managing director of corporate development for SBC. "We don't expect to change the guidance we've given the Street for 2000," McGaw told a news conference audience this morning.
Which is why SBC's shares haven't dipped today beyond the level you'd expect from the usual arbitrage activity. It's hard to complain about an acquisition that doesn't hurt and can only boost the top and bottom line.
The only real question is: how good is Sterling? Is this company a genuine Web commerce play or an desperate EDI company? A look at the company's products shows Electronic Data Interchange popping up quite a bit, but that can be deceptive. As a percentage of Sterling's overall revenue ($561 million last year), pure Web business now generates in the "high 30s, low 40s" and is growing between 70 and 75 percent a year, says Brad Sharp, Sterling's president and chief operating officer.
If executives are right, SBC won't do anything to screw that up, to the point of maintaining a separate sales force for Sterling. "We'll continue to operate stand alone," Sharp said.
Let the Baby Bell do what it does well, and reap the profits from ancillary units. If you're an SBC shareholder (and not in it solely for dividends), that may be the most encouraging revelation: their company now has an imagination.
Other issues:
I'm not so sure SBC's peers will follow its strategy, just because the plan makes sense for SBC. MCI Worldcom already has the largest position in the U.S. data market, so arguably it doesn't need to make a sharp move; besides, Worldcom, Qwest and Global Cross still have large acquisitions to complete before they can take on others. GTE (NYSE: GTE) remains on the plate for Bell Atlantic (NYSE: BEL). AT&T is wrapped up in network upgrades, wireless spinoffs and other internal affairs. BellSouth (NYSE: BLS) seems to be reluctant to make any moves at all, and in any case, doesn't offer the same scale or synergies as SBC.
Maybe one of the pure Web marketplace firms might be tempted to expand its roster with Harbinger, but why would an Ariba (Nasdaq: ARBA) or Commerce One (Nasdaq: CMRC) want to remove itself as a pure Web play? Would an ERP vendor be tempted? I just don't see it -- a company like SAP (NYSE: SAP) or Oracle (Nasdaq: ORCL) could just as easily partner with someone rather than carrying out an expensive acquisition. And the enterprise guys usually build their own stuff anyway.
Not that there's anything wrong with Harbinger. The company has come a long way from its troubles a couple of years ago and sees strong prospects for its own Web commerce networks. But that doesn't neccesarily make it a great fit with anyone else. 22GO>