Convergence is the key to the latest US mega-deal. Here is some hypewatch on yesterday’s announcement as well as ten points of commentary on the underlying issues that you probably won’t read elsewhere. 

Yesterday’s announcement of the agreed takeover (sorry, that’s called a “merger”) of BellSouth by SBC (sorry, it’s now called “AT&T”), valued at US$67bn, is a bombshell. Yet, by the hyperbolic standards of language we have come to know in the US technology sector, it was a dud. Consider the following CEO statements from yesterday:

"This merger is a logical next step that creates substantial value for customers and stockholders of both AT&T and BellSouth," said AT&T Chairman and CEO Edward E. Whitacre Jr. "It will benefit customers through new services and expanded service capabilities. It will strengthen Cingular through unified ownership and a single brand. And we are confident that this is a merger we can execute, based on our track record with previous integrations and our experience working closely with BellSouth to create and build Cingular Wireless, and operate Yellowpages.com.”

"This transaction combines two solid, very well-run companies," Whitacre added. "BellSouth operates in an attractive region with a growing economy. It has great employees and an outstanding network, with fiber optics deeply deployed in its service area. It has a strong record in terms of customer service and a sound, conservative balance sheet. These strengths, added to those of AT&T, will improve our ability to provide innovative services to more customers while returning substantial value to our owners and improving our growth profile."

"Technology changes and convergence are shaping a new competitive dynamic and creating tremendous opportunity," said Duane Ackerman, chairman and CEO of BellSouth. "We're creating a company with much better capabilities to seize these opportunities while maintaining its strong focus on customer service and community involvement.

"This was the right time for this merger," said Ackerman. "This combination is good for our employees, our customers and our stockholders."

"Our focus is on providing great service and innovative, competitively priced products for consumers and businesses throughout the Southeast, the nation and the world," said Whitacre. "Together, we will lead the way into a new era of converged and bundled communications, video and entertainment services while also improving our ability to manage complex networks."

There is much contained in those statements that is platitudinous: “logical next step”, “an outstanding network with fibre optics deeply deployed”, “sound, conservative balance sheet”, etc.

Then there is some common-or-garden excited corpspeak: “a new competitive dynamic”, “a new era of converged and bundled communications, video and entertainment services”, “improving our growth profile”, and so on.

And then there is the hype, most especially the deal’s bearing on “the Southeast, the nation and the world.” As Scarlett O’Hara might have said, it’s more like “today Atlanta, tomorrow the Greater Atlanta Metropolitan Area and surrounding counties.”

Frankly my dear…
By current standards this is low key. But what to make of it all? Here’s a ‘cut out and keep’ list of ten issues that will shape the debate over the deal in the weeks (more accurately, the months) ahead.

1) Here’s Humpty!
When the old AT&T (known as ‘Ma Bell’ or ‘the Bell System’) was broken up by antitrust decree from 01 January, 1984, it spawned seven so-called ‘Baby Bells’: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell and US West. If SBC/AT&T-BellSouth goes ahead, these seven will have become just three. Even before yesterday, many US politicians had castigated this drip-drip of consolidation as a process of “putting Ma Bell back together again”.

2) Here’s Humpty! (2)
The subsequent mergers of the Regional Bell Operating Companies (or RBOCs) notably saw NYNEX and Bell Atlantic join in ‘Verizon’; Southwestern Bell and Ameritech in ‘SBC’ in the 1990s.They hardened into operating companies with market caps as of 03 March, 2006 of around US$92.7bn and US$92.4bn respectively. BellSouth had a market cap of some US$57.5bn on the same date.

3) What’s in a name?
AT&T’s submissive takeover by SBC last year, in a deal which when completed was worth US$15bn give or take, appeared to some (including us, click here) as little more than a cynical exercise in reverse branding. So it transpires: only a fool would underestimate the power of the AT&T label in the arguments to come, even though that brand image was sullied ahead of the SBC takeover (for an odd take on all of that, courtesy of us, click here). Yet SBC is now spearheading its move against BellSouth with a gamble on the residual pulling power of the AT&T brand.

4) Here’s Humpty! (3)
Apart from SBC’s acquisition of AT&T, Verizon’s near-simultaneous acquisition of MCI last year (in the face of opposition from the mightiest RBOC midget, Qwest) and subsequent regulatory approval for both takeovers seems to have by extension greenlighted this latest deal. The “putting Ma Bell back together” argument will fester, but the case law increasingly favours consolidation.

5) Quadruple play
SBC’s statement yesterday talks of creating “a real alternative to cable monopolies”. Convergence (see (9) below) is the only justification.

6) Lawyers and loafers
A takeover of this size will likely turn into a litigation-fest for lawyers and lobbyists. Unlike SBC-AT&T or Verizon-MCI, this is big ticket stuff that might create a combined technology company behind only Microsoft in terms of market capitalisation. This will take years to resolve.

7) Rival bidders?
None – unless Qwest has stopped taking its prescribed medicine or a combination of Vodafone and T-Mobile starts taking a near-lethal combination of non-prescribed ones..

8) Herd effect?
This will embolden or pressurise European carriers to follow suit in a new wave of consolidation. Oh dear me. The usual suspects from France, Germany, Spain, Italy the UK and Japan may feel they need to respond. More percussively, powerful incumbents in China and even India may do likewise.

9) Convergence?
The focal point of this US$67bn offer for both SBC and BellSouth is Cingular. SBC paid US$40bn for AT&Ts stake in Cingular back in 2004; the US$15bn acquisition of remaining rump-AT&T last year suggested a dense closure of convergent inclusion. A deal with BellSouth would bring home the rest of the mobile operator while exposing SBC to a new range of fixed-line customers. 

10) Declining value
In a protracted regulatory debate over this takeover, can the companies involved maintain their value? The only answer to that question with a positive outcome involves wireless; and where does that leave the fixed-line burden of these mating RBOCs?

And where does that leave the deal? Only the lawyers can tell you.
Jim Chalmers