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US West, Global Crossing in merger talks

The two telecom players are conducting merger talks, CNET News.com has confirmed, in what would be a unique merger between a Baby Bell and a telco newcomer.

Global Crossing and US West are conducting merger talks, CNET News.com has confirmed, in what would be one of the first marriages between a traditional phone monopoly and an aggressive telecommunications newcomer.

Although deal would be a merger of two firms with comparable market values, US West would likely be the leading partner in the transaction, a source close to the companies said.

US West and Global Crossing declined to comment on the talks.

Global Crossing was founded just two years ago, and until recently has focused on building out a network of high-speed undersea cables. But in recent months it has used its skyrocketing stock value to expand its business, buying long distance fiber-optic carrier Frontier for $12.5 billion in March.

US West is the smallest of the remaining Baby Bell phone companies, which were split off from AT&T in 1984. The company dominates the local phone markets in 14 states across the western United States.

While its largely rural customer base has prevented it from growing as quickly as Bell Atlantic or SBC Communications, US West has taken a lead in rolling out high-tech services such as digital subscriber line (DSL) and video service, and wireless data communications.

News of the potential transaction was first carried on financial news station CNBC. The network reported that the deal would be worth about $35 billion, and would likely see US West CEO Sol Trujillo and Global Crossing CEO Robert Annunziata share a co-chief executive role.

The companies hoped to have a deal in place by Monday, CNBC reported.

Can opposites really attract?
News of the proposed merger appeared to please Wall Street, where both companies' stock climbed today.

"I think would be strategic benefits of coming together on both sides," said Deutsche Bank Securities analyst Stuart Conrad.

Global Crossing would gain access to US West's local footprint, valuable corporate accounts in high-tech areas such as Denver and Seattle, and new momentum in the data business, Conrad said. US West would ultimately get a high-quality long distance network, a goal all the local phone companies are looking to achieve, he added.

But the combination would have some initial hurdles--and some more deeply rooted sticking points--according to analysts.

US West is barred from offering long distance service until it proves to federal regulators that it has opened its local phone markets to competition. So until the company gets federal approval to expand its markets, the combined company can't offer Frontier's long distance service in US West's 14-state territory, analysts said.

That wouldn't necessarily kill the deal, however. The company could simply put any of Frontier's long distance services on hold for those 14 states, or work out some other kind of operation. Or the company could wait to complete the transaction until US West actually gets federal long distance approval, a period that could be a year to several years.

"I think there's ways to finesse the regulatory issues," said Boyd Peterson, a senior telecommunications analyst with The Yankee Group.

But the necessity of positioning Frontier and US West apart from each other underlines the potential weaknesses in the matchup, Peterson added. The merged company could not quickly match MCI WorldCom and other long distance services, which tout their ability to carry corporations' traffic on local and long distance end-to-end networks, he noted.

"It's less than a slam dunk in seeing how the pieces fit together," Peterson said. "It becomes an interesting amalgam--almost a holding company with different components."

Also troubling could be the corporate culture clash between the aggressive, entrepreneurial Global Crossing, and the established Baby Bell with its protected markets and regulated growth, analysts said.

This difference could also threaten stockholders' approval of the deal, some analysts added. The two companies have very different growth profiles--one of the key factors that derailed the proposed merger between Bell Atlantic and cable company Tele-Communications Incorporated in 1994.

"There are investments which you make if you want a high risk, and Global Crossing is one of those. There are investments you make if you want security, and US West is one of those," Peterson said. "The RBOC's [regional Bell operating companies] shareholders have to look at this and say whether this is what they really want."

Frontier executives also must approve any Global Crossing merger deal that exceeds $2.5 billion, according to their previous merger agreement.

Global Crossing shares closed up nearly 2.3 percent to 61.37 on the news. US West shares climbed by almost 3.8 percent, up to 62.25

News.com's Ben Heskett contributed to this report.