The Urge to Merge

Posted: 07/1998

The Urge to Merge

By Jennifer Haney

In the first five months of 1998, $614 billion worth of transactions have been
announced by corporate America. Compare this figure to the record-setting $908 billion for
all of 1997. Of that $614 billion,approximately $90 billion is claimed by the
following telecommunications megamergers representing only a fraction of the mergers the
industry has actually experienced: Excel Communications Inc./Telco Communications Group
Inc., Interstate FiberNet/DeltaCom, Bell Atlantic Corp./NYNEX Corp. and SBC Communications
Inc./Ameritech Corp. With the gradual and much-debated elimination of state- and
court-imposed barriers to local market entry and deregulation of the telecommunications
industry at large, the Telecommunications Act of 1996 has spurred a type of
competition–the competition to merge–foreseen by some, but the force of which was quite
unexpected.

Despite all the media attention to megamergers such as MCI Communications
Corp./WorldCom Inc., there has been a spate of merger activity even among smaller
companies. James M. Smith, vice president, law and public policy for Excel, says one of
the major differences between the Excel/Telco merger and the Bell Atlantic/NYNEX merger is
that Excel, a reseller of long distance services primarily to residential customers, and
Telco, a facilities-based carrier with a commercial product and a sales force to sell to
business customers, joined the forces of two complementary companies to create a
facilities-based carrier with a strong connection to residential as well as commercial
business. Excel’s access to the Telco network will better position the combined company to
enter the $100 billion local telephone market and ultimately provide a package of local,
long distance and wireless services. "Bell Atlantic and NYNEX," Smith says,
"would rather get together than duke it out in competition for each others’
territories."

When Bell Atlantic and NYNEX announced their controversial decision to merge, it
received the conditional consent from the Federal Communications Commission (FCC) based on
the understanding that the marriage would lead to greater local phone competition in the
companies’ combined territory. The merged companies, to be called Bell Atlantic, promised
they would take steps to make it easier for competitors to gain a piece of the market in
their regions in the hopes that this would win them the FCC’s approval to provide long
distance services within their own regions.

So, what would prompt Bell Atlantic and NYNEX to merge? Some analysts believe that in
order for the Bell companies to position themselves to be able to compete with the long
distance giants, they need to have competitive operating costs. This merger was predicted
to cut some 3,000 jobs, mostly corporate and administrative positions, according to
companies’ sources quoted by the CNNfn channel. It has made the new Bell Atlantic the
nation’s second largest telecommunications company (barring the recently announced
SBC/Ameritech merger), after AT&T Corp., with almost $27 billion in annual revenues.
The multibillion-dollar East Coast merger has given the combined companies control over 12
states from Maine to Virginia and a shot at an estimated $14 billion worth of annual long
distance traffic throughout the region. In a July 1997 statement, then-FCC Chairman Reed
Hundt said the merger would "bring enforceable, pro-competitive, market-opening terms
to the whole Bell Atlantic/ NYNEX region in a way that offsets the loss of Bell Atlantic
as a potential competitor to NYNEX. Based on these conditions, I personally believe we can
and should approve the merger as in the public interest."

The FCC strongly believes if the new Bell Atlantic complies with all of its conditions,
competition will have been fostered through this merger. However, critics of the merger,
angry at the Department of Justice’s unconditional approval of the merger, wonder
if the deal can be adequately enforced. As some analysts have noted, Bell Atlantic and
NYNEX have only promised they are going to negotiate more fairly with rivals. As many
CompTel members will attest, their track record at negotiating fairly leaves something to
be desired in many cases.

While Bell Atlantic continues to cruise behind the pace car, waiting for the green flag
into the long distance market, SBC Chairman Edward E. Whitacre Jr., has taken the
checkered flag and began preparations for the victory lap. The proposed SBC/Ameritech
merger has put a whole new face on the industry. This $61 billion stock transaction would
create the country’s largest telephone company with control over an estimated 57 million
phone lines; a new type of telecommunications company with a national-local focus combined
with national and international service capabilities. The company will have the assets,
scope and strategies to compete against incumbent local exchange carriers (ILECs),
competitive LECs (CLECs), long distance companies and global competitors. Whitacre has
thrown down the gauntlet by declaring that SBC is going to be one of the world’s largest
telecommunications companies–and he is going to lead it. SBC will need billions of
dollars to carry out this plan, and this is where Ameritech figures in.

By contrast, there are some telecommunications companies whose merger plans are drawn
up with an eye toward tackling a niche market–instead of the world. Analysts have
predicted that the shakeout of most industries reveals a few, very large, global players
and then smaller companies (relatively speaking) that prove to be very prosperous in niche
markets. ITC^DeltaCom, a product of the 1997 joining of Interstate Fibernet and DeltaCom
serving the BellSouth region, has focused its efforts on becoming one of the niche
players. What these two companies discovered in the Telecom Act was a "great
opportunity to become a full service provider of long distance and local services,"
says Drew Walker, CEO of ITC/DeltaCom. DeltaCom provided the long distance, business
customer base and billing system, while Interstate Fibernet added the network–and it’s
still adding. "It was a very complementary merger," Walker says, adding the
company is able to serve its customers with a level of personalization not found in larger
companies.

The Telecom Act concentrated on fostering competition. The FCC proclaimed
"competition" to be in the public interest. And, if that is true, then how can
competition exist if companies merge rather than compete? There are scores of questions
still lacking answers. The bottom line is, as FCC Commissioner Michael Powell was quoted
as saying in a recent Wall Street Journal article, "Nobody’s had a clear
vision of what they meant by competition. How many competitors do you mean? How big are
they? We talk about one-stop shopping, but what do those companies look like? Companies
are beginning to make their judgments about these questions–and stake the flag and go for
it."

Mergers such as Bell Atlantic/ NYNEX and SBC/Ameritech harbor much criticism because
they join the forces of two companies, currently monopolies in one market, that pose the
threat of becoming monopolistic in other markets if not regulated. Sen. John McCain, the
Arizona Republican who chairs the Senate Commerce Committee, says the SBC/Ameritech merger
is more evidence that the Telecom Act has failed. "Companies consolidate when they
can’t compete, and consolidation without competition can hurt consumers," McCain was
quoted as saying in a recent Wall Street Journal article.

The warnings are coming from all over. In a May 12 Wall Street Journal article,
former FCC Chairman Reed Hundt was quoted, asking, "How many big phone companies does
the government want in America?" Now, he says, the "industry is going to ask
this question of the government until it gets an answer." And, he warns, if an answer
doesn’t come, then "you basically force merger mania, because what do you expect
other CEOs to do, sit on their hands?"

Jennifer Haney is director, member affairs, for the Competitive Telecommunications
Association (CompTel). She can be reached at (202) 296-6650.