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SBC to acquire AT&T for $16 billion

SBC says the deal will give it one of the world's "most widely recognized and respected" brand names. Photos: AT&T's history of innovation

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
SBC Communications on Monday announced plans to acquire AT&T in a $16 billion deal, a move designed to bolster SBC's sales to enterprise customers nationwide and give it new national and global networks.

The deal also ends more than 100 years of independence for AT&T, also known as Ma Bell, which was forced by federal antitrust regulators to break up its operations in 1984. That spawned the creation of the Baby Bells, including SBC, which focused on local telephone services, while Ma Bell served as a long-distance carrier.

"The point I want to emphasize is, as a combined company, we will have greater resources and greater capabilities than we could have alone," Edward Whitacre Jr., SBC's chairman and chief executive, said during a conference call with analysts.

The deal, he said, will combine AT&T's national and global networks and expertise with SBC's strong platforms and skills in local exchange service, wireless and broadband.

The acquisition is a sign of ongoing consolidation among both traditional landline providers like SBC/AT&T and cell phone operators. Cingular Wireless, the cell phone operator partly owned by SBC, catapulted to the top of the U.S. cell phone market in late 2004 by purchasing AT&T Wireless, and Sprint is buying Nextel Communications, the cell phone operator catering mainly to businesses. With fewer choices, consumer advocates say prices of phone service will likely creep up after many years in decline.

Telephone providers have been engaged in a turf war with cable companies and Net phone carriers, which have encroached on the Bells' role as the primary source for delivering phone calls. By the same token, telephone carriers have been looking at ways to expand their markets, by delving into wireless and offering high-speed Internet connections.

Edward Whitacre
Chief executive, SBC

The purchase is expected to close in the first half of next year. SBC says the acquisition should contribute to its earnings growth in 2008, when the company says it will begin to see the fruits of $15 billion in savings, which the company says would play out over more than seven years. Those savings are expected to come through layoffs and the shutting down of duplicate facilities and equipment.

SBC shareholders bid that company's stock up 15 cents to $23.77 a share in early trading. AT&T shareholders were less enthusiastic, pushing the shares down 69 cents to $19.02 each in morning trading.

Top management at the combined company is expected to call for Whitacre to continue to serve as chairman and CEO, while AT&T's chief executive, Dave Dorman, will be president of the combined company.

"AT&T is very excited about this opportunity. It's a significant milestone for both companies," Dorman said during a conference call with analysts on Monday. "Together, SBC and AT&T will be the premiere provider for a full integration of solutions globally."

Checking out the dowry
AT&T will be bringing to the table its global IP-based networks and fast-growing voice over Internet Protocol (VoIP) business, which it sells in 100 major markets. AT&T operates 26 Internet data centers worldwide, equally divided between the United States and other countries.

"Right now, AT&T's IP network is far better than anyone else's out there," said Frank Dzubeck, CEO of Communications Network Architects, a telecommunications consultancy in Washington, D.C. "SBC, on its own, isn't even close."

SBC will also retain AT&T's brand name, though it is not clear how the

brand will be used. AT&T's brand is well-established, especially among large corporate customers, whereas SBC has been a regional telecommunications carrier, with its main presence in the western and southwestern states.

"We value the heritage and strength of the AT&T brand, which is one of the most widely recognized and respected names throughout the world, and it will certainly be a part of the new company's future," Whitacre said.

Ma Bell's rise and fall
AT&T's fortunes have waxed and waned over more than 100 years, as the company became one of America's best-known brands and created some of the Net's basic technologies. Its late-1990s transformations helped lead to its downfall.

• 1877: Bell Telephone Company formed.

• 1885: American Telephone and Telegraph completes first line. Capacity: one call.

• 1946: Begins offering rudimentary mobile telephone service.

• 1958: Introduces first commercial modem.

• 1971: Bell Labs researchers create Unix operating system.

• 1984: Ma Bell splits into AT&T and "Baby Bell" local phone companies, including SBC.

• 1991: Buys NCR, a computer maker.

• 1993: Buys McCaw Cellular Communications, which becomes AT&T Wireless.

• 1996: Sells NCR and Lucent Technologies, its products division.

• 1998: Buys Tele-Communications Inc for $48 billion.

• 1999: Buys Media One cable network for $54 billion. Microsoft invests $5 billion in AT&T.

• 2000: March: Assumes control of Excite@Home. October: Announces will spin off wireless and cable divisions as separate companies.

• 2001: October: Agrees to buy

Excite@Home for $307 million; deal later collapses. December: AT&T Broadband and Comcast merge, forming biggest U.S. cable company.

• 2002: Excite@Home closes.

• 2004: Cingular buys AT&T Wireless, forming biggest U.S. wireless company.

• 2005: SBC buys AT&T for $16 billion.

In addition, SBC will inherit AT&T Labs, which globally has more than 5,800 issued and pending patents.

SBC, meanwhile, has a strong presence in the local market with 52 million phone lines and 5.1 million DSL lines. That presence in the local consumer market contrasts with AT&T's decision in July to forgo pursuing new local customers and focus instead on corporate accounts.

Ma's home...but will the kids start squabbling?
Monday's deal will also bring full circle what was once AT&T's wireless service. Four years ago, Ma Bell spun off its wireless operations in a $10 billion IPO as part of a major restructuring, forming the independent AT&T Wireless. But last year, AT&T Wireless was sold to Cingular Wireless, a joint venture in which SBC holds a 60 percent ownership stake. The other 40 percent of Cingular is owned by BellSouth. Cingular has a temporary license to use the AT&T Wireless brand while it transitions the service off of the AT&T-based name and logo.

Some analysts, however, expressed concern that the Cingular joint venture could be strained as a result of the AT&T deal.

"It's inevitable that this merger will create friction between SBC and BellSouth," said Viktor Shvets, an analyst with Deutsch Bank North America. He said the deal makes SBC a larger competitor to BellSouth. Also, a merger between SBC and BellSouth--long a prediction of industry watchers--could face stiffer antitrust hurdles with the addition of AT&T's assets.

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Whitacre dismissed concerns about the BellSouth partnership.

"We have a great relationship with BellSouth. I don't anticipate there will be any problems for Cingular, and this will actually help them pick up more business customers," Whitacre said.

The deal takes place as AT&T is abandoning the residential phone business, which it invented 130 years ago. Since the break-up, AT&T has relied on Federal Communications Commission rules that guaranteed it access to the network it once owned and that also regulated the terms and prices local phone monopolies could demand from rivals seeking to rent parts of their networks. When those rules phased out in late 2003, many analysts predicted an uneven playing field among companies seeking to offer phone and broadband service.

AT&T had meant to rally, making 2004 the "Year of the Giant" with its CallVantage phone service. The Internet telephony plan was intended to help Ma Bell, remain in the residential phone market, and maybe even thrive there. But the number of CallVantage subscribers may be less than 100,000, according to a source, which puts in doubt whether AT&T will meet its goal of attracting a million subscribers by year's end.

Consolidation: Is it the new black?
The merger is also expected to stir up further consolidation in the market, Shvets said. MCI, AT&T's top competitor, could be the next acquisition target. Analysts say it makes sense for any of SBC's fellow Baby Bells--Verizon, Qwest Communications, or BellSouth--to acquire MCI.

Like AT&T, MCI has an extensive nationwide and international IP network. The company, which emerged from bankruptcy last spring, has also been targeting business customers. But also like AT&T, MCI has been struggling to offset declining revenue from its long-distance business.

"When one company gets bigger like this, everyone else starts looking around for opportunities," Shvets said. "It's like a mudslide. Once it starts, you can't stop it. You just have to grab the twigs on the way down."

The process of closing the deal may take longer than most mergers, due the regulatory climate that governs telecom companies. SBC will need approval for the deal from 26 to 28 states, the U.S. Department of Justice and the Federal Communications Commission.

Under the deal, AT&T shareholders will receive 0.77942 shares of SBC common stock for every share of AT&T, which translates into $18.41 a share. AT&T investors will also receive $1.30 a share in a special dividend. The deal is expected to close in the first half of next year.

News.com writers Maggie Reardon and Ben Charny contributed to this report.