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Street cool on telco merger mania

Although the telecommunications industry is caught up in the "urge to merge," few Wall Street analysts and investors seem wooed.

Although the telecommunications industry is caught up in the "urge to merge," few Wall Street analysts and investors seem wooed by promises that the newly combined companies will grab greater market share and generate increased profits.

A day after announcing the $53 billion GTE-Bell Atlantic merger, shares of both companies have barely budged and are trading well below their 52-week highs. GTE was up 1.13 per share at 54.19, while Bell Atlantic was up 1.19 at 45.50. The companies have traded at 52-week highs of 64.38 and 53, respectively.

AT&T's stock slid last month after the company announced a $48 billion merger with Tele-Communications Incorporated in a bid to provide a "one-stop shop" for telephone, digital television, and Internet access. The drop fueled speculation that the deal would need to be renegotiated. AT&T's shares slowly have crept back up, but its proposed merger has generated little market enthusiasm.

AT&T's $10 billion partnership with British Telecommunications has not generated much interest on Wall Street, either.

"We have seen this [decline] in a lot of recent deals, not just in the telecom sector," said Linda Varoli, an analyst with Merger Insight, a market research service. "It seems there is a lot of skepticism in the market right now about whether companies are buying because they want to, or whether they feel they have to."

Telco stocks are seeing little movement because they already were priced too high, said Jeff Pittsburg, a partner at Goldis-Pittsburg Institutional Services, an investment banking firm. "The stocks ran up in anticipation of a coming deal--sometimes within reason and sometimes [not]," he said. "I don't expect they'll go down a lot, but I do expect they will stay in the range they are in already."

Others are taking a step back from the merger mania and questioning these companies' efforts to combine resources.

Most companies proposing the mergers are planning on spending billions of dollars to leverage the growth opportunities they are touting, said Steven Bregman, a senior analyst at Horizon Research Group. "They are planning a lot of spending, [but] the competitors also are spending. This doesn't guarantee anything for anyone."

Other forces also are at play, decreasing the market's enthusiasm for the telco mergers. In recent weeks, the bears have been slowly rearing their heads, culminating in the Dow's 400-point decline last week.

"It's like a rising tide that lifts all the boats," said Varoli. "Unfortunately, when the tide goes out, all the boats get grounded."

Also this year, SBC Communications and Ameritech, both giant local Bells, agreed to merge in a deal valued at $60 billion. WorldCom and MCI Communications also have proposed a $37 billion merger.

Despite the cool reception the telcos proposing mergers have received from Wall Street, most analysts think the merger mania will continue.

"We are not through with these mergers," said Pittsburg. "We are going to end up with a half-dozen firms that are capable of doing everything on a competitive basis."