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Merger mania or just telecom talk?

Rumors of mergers are sweeping the beleaguered telecommunications industry, and some say that's for a good reason.

Have you heard the rumor about AT&T Wireless and Cingular Wireless hooking up? How about Ericsson and Microsoft? And of course, the VoiceStream Wireless chatter is circulating again--but everyone's heard that one.

"It's summertime and the rumors are easy," said a Sprint executive, observing the plethora of rumors--and the resulting headlines--that are swirling around the beleaguered telecommunications industry.

These rumors, met with everything from bemusement to indignation, are spreading for a reason: Everyone agrees that conditions are ripe for a major consolidation. Many analysts are predicting that the top six cellular phone service providers will boil down to just three or four before the end of the year.

Why? Cell phone subscriber growth is slowing, forcing carriers to look elsewhere for revenue. The cost of building new telephone networks is proving too much for some cash-strapped companies to bear on their own, with some carriers already sharing the costs.

Many of the major players have issued profit warnings, and their stock prices are taking a beating. And there are simply too many providers in some markets, such as the seven competing for the same customers in New York City.

One of the latest rumors was shot down Thursday, when a spokesman for Ericsson denied rumors that Microsoft was interested in acquiring the Swedish telecommunications equipment maker.

Among the other more widely circulated rumors are that VoiceStream Wireless, controlled by Deutsche Telekom, will join forces with AT&T Wireless or that struggling network equipment makers like Lucent Technologies and Ericsson are in talks to be bought out by a major U.S. carrier. There's also speculation that AT&T Wireless, Cingular and VoiceStream will be balled up together into one monolithic provider.

On the equipment front, Cisco Systems remains among the most cash-rich companies, which in itself has prompted another round of acquisition rumors, with likely candidates including Nortel Networks--dropped from the S&P 500 this week--and Ciena.

But Cisco typically snaps up younger companies with promising technology rather than swallowing large, struggling public companies in a merger. Most recently, Cisco bought privately held Hammerhead Networks for up to $173 million in stock and Navarro Networks for up to $85 million in stock to improve its IP networking technology.

Most companies simply ignore the chatter, but AT&T Wireless spokesman Ritch Blasi was reduced to answering his phone Wednesday with a brisk "no comment," knowing the call was about a published report, citing unidentified sources, that discussed a possible merger with VoiceStream. Such a deal would create the second-largest U.S. carrier, with a combined 25 million subscribers. Verizon Wireless is the nation's largest wireless carrier.

One scenario making the rounds is that the two companies have already cut a deal and that Cingular is now busy scrapping all but AT&T Wireless' "mMode" wireless Web service. But there are a few problems with that scenario. For example: Cingular is already owned by SBC Communications, making it far more complicated to consider a merger because of possible antitrust concerns. No matter--the chat boards are still buzzing: SBC will spin out Cingular Wireless as an independent company, then buy Sprint PCS so they can have a cellular arm, or so go the rumors.

"What are you smoking?" was Cingular Wireless spokesman Clay Owen's response to the latest rumors.

So far no announcements have been made, and most telecommunications executives say not to expect anything too soon. Qwest Communications is so far the only carrier to publicly say it has something to sell. Qwest is said to have put its wireless business up for sale in an effort to eliminate the unit, which has 1 million customers.

The industry rumors aren't that surprising, said the Sprint executive, who requested anonymity. "Telecommunication is sucking right now; it's right before earnings season, there's nothing going on, and no new products going out. So what are (reporters) going to report on?"

AT&T and Cingular sitting in a tree
The most likely merger will be between Cingular Wireless and AT&T Wireless, whose stock price has been sheared by two-thirds since its initial public offering, the prognosticators believe.

The signs have been building for months. Nippon Telegraph, which owns about 16 percent of AT&T Wireless, is said to be unhappy with its foreign investments after it had to write off billions in losses.

Also, Cingular Wireless and AT&T Wireless already plan to share part of their telephone network, having agreed to split the burden of building a network along 3,000 miles of interstate highways in the Western and Midwestern states.

"It wouldn't shock me if that happened," said one telecommunications executive who requested anonymity.

Cingular Wireless might be a long shot to buy anything, though, partly because it isn't a public company and can't go to the public markets for cash, Prudential Securities analysts Christopher Larsen, James Moorman and Gregory Simcik said in a recent research note.

"Of the specific merger combinations, we believe a Cingular-AT&T Wireless combination could be among the most likely possibilities," the analysts wrote.

VoiceStream Wireless has emerged as the third most likely merger candidate.

Ron Sommer, chief executive of Deutsche Telekom, which owns VoiceStream, is under pressure to find some cash, SoundView Technology Group analyst Timothy O'Neil wrote in a report to clients Wednesday. After paying $31 billion for VoiceStream in 1999, Deutsche Telecom might be enticed to sell its stake, the report said.

"For the first time in months within the wireless sector, we see a willing seller," O'Neil wrote.

"VoiceStream has been a proverbial hot potato made up of several companies that were quickly sold to DT," said Jefferies analyst Ben Abramovitz.

VoiceStream Wireless also has the lowest share of the wireless marketplace--about 6 percent--of the nation's top six carriers, said Peter Friedland of WR Hambrecht. A company could snap it up and add its customers to the mix without triggering antitrust concerns, he said.

The lack of market share also makes Nextel Communications, which has a 7 percent market share, a good takeover candidate, Friedland said. AT&T Wireless, which has 16 percent of the market, could buy Nextel, for instance, and not likely trigger antitrust investigations.

"Any market share north of 35 percent probably won't pass regulatory muster," Friedland said.

Low on the merger radar
Verizon Wireless is said to be on the merger sidelines, partly because of its involvement in the NextWave Telecom spectrum auctions.

The nation's largest cell phone provider thought it bought the spectrum that NextWave once owned and that federal regulators then seized after the company filed for bankruptcy. A court said that the regulators acted improperly and returned the spectrum to NextWave.

The issue remains in courts. The ongoing legal battle means that Verizon Wireless will still be on the hook to come up with the $8.7 billion it bid if a judge resolves the issue in Verizon's favor.

Verizon Wireless also has about 24 percent of the cell phone market in the United States, making any significant acquisition improbable because it would likely trigger an antitrust review, Friedland said.

Sprint PCS is also not part of the rumor whirlpool yet.

The reason is that the carrier is about to launch a new telephone network this August, a multibillion effort expected to double the number of cell phone calls that can go through its network at any one time.

It's not likely to give up its independence now, Abramovitz said.