ATLANTA — Last winter, BellSouth CEO Duane Ackerman passed — yet again — on a chance to turn his company into a global player. The invitation came from his old friend and business partner, SBC CEO Ed Whitacre.
Cingular, owned by BellSouth and SBC, had just bought AT&T Wireless for $41 billion. The deal, which was largely negotiated by Whitacre, turned Cingular into the USA's No. 1 cellphone carrier overnight.
Whitacre thought it made sense for SBC and BellSouth to merge. By combining, he argued, the two carriers could streamline Cingular's management and create a formidable competitor for the coming war with cable TV.
Ackerman wasn't interested. But he did have an idea: merge the assets of BellSouth and SBC to create three separately traded companies — a traditional phone company, representing the local and long-distance assets; a wireless business; and Yellow Pages. By going that route, Ackerman pressed, SBC and BellSouth could create immediate value for shareholders.
Whitacre took a pass. Then he turned on a dime and went after AT&T. People with direct knowledge from both companies confirm the story's details, but declined to be quoted by name because of company policies that prohibit public comments on business proposals.
Ackerman's dealmaking conservatism is about to come back and bite him.
On Monday, the Federal Communications Commission gave its blessing to the acquisitions of AT&T and MCI by SBC and Verizon, respectively. The two deals will turn SBC and Verizon into formidable global competitors. The new companies will overshadow BellSouth, which has not been nearly as aggressive in creating a battle plan to carry it into the future. (Related item: Telecom mergers get FCC's blessing)
One little-discussed aspect of the SBC-AT&T deal is its impact on Cingular. Once the AT&T merger closes, BellSouth will be in the unenviable position of having to compete against its wireless partner. SBC — which intends to rename itself AT&T — plans to storm BellSouth's Southeastern territory soon after the merger. Verizon has a similar plan.
Can the Cingular marriage survive in the post-AT&T world?
Ackerman, in an interview, insists the Cingular partnership is strong. "This one is big enough that neither one of us can afford to let it fail," he says.
Part of that, he says, is owing to the huge stakes on the table. BellSouth gets 40% of its revenue from Cingular; SBC gets about a third.
Some analysts have a different view of the venture's future.
"I think it's going to dissolve," says Lisa Pierce of Forrester.
Elroy Jopling of Gartner Group thinks Cingular can last for two years — tops — in its current form. "You're basically looking at 18 months or so before Cingular turns ugly from a decision-making basis," he says.
BellSouth's larger problem, analysts say, is its think-small strategy.
Based in Atlanta, BellSouth sat out the merger dance of the 1990s. As a result, it still serves the same nine states that it did in 1984 when the AT&T phone monopoly was broken up by court decree. Back then, BellSouth was the largest of the Bells. Today it is among the smallest, with about $28 billion in revenue in 2004.
By year's end, SBC — an amalgam of Southwestern Bell, Pacific Telesis and Ameritech — will dominate the western USA. Verizon — a combination of Bell Atlantic, Nynex and GTE — will dominate the East. Once the AT&T deal closes, SBC will become the USA's largest telecom, with about $110 billion in annual revenue. Verizon, with $90 billion in annual revenue, will become No. 2.
With AT&T and MCI in their pockets, SBC and Verizon will instantly gain the ability to reach all 50 states. They'll also be able to court business customers, touting global services that BellSouth can't easily offer and aggressive prices it may not be able to match profitably. Over time, they are likely to go after residential customers as well.
Cable companies also are taking aim. Comcast, Time Warner and other cable operators are rapidly adding VoIP — Voice over Internet Protocol — to their service bundles. By 2008, some analysts predict there will be more than 40 million VoIP subscribers. The assault is one reason the big carriers are losing about 5% of their basic phone subscribers each year. Those losses are expected to accelerate over time.
Phone companies, eager to blunt their losses, are returning fire by adding video to their lineups.
Once the competitive rumble gets going, BellSouth will quickly feel the heat, says Jan Dawson, an analyst for Ovum in Boston. "BellSouth's profit margins will be squeezed and squeezed and squeezed until there is potentially nothing left," he says.
Future in question
The coming communications war has convinced some analysts that BellSouth's future as an independent company is uncertain.
Blair Levin, of Legg Mason Wood Walker, says he wouldn't be surprised to see BellSouth get picked off — probably by SBC — soon after the AT&T deal closes.
Pierce agrees: "They'll merge with somebody," she says flatly.
But first BellSouth and SBC will have to figure out Cingular's future. That might not be easy, or cheap.
Cingular's biggest problem, by far, is the management structure. SBC and BellSouth split revenue 60-40, but management decisions are shared equally.
In practice, that means SBC and BellSouth can't make a move without the blessing of the other, people with direct knowledge of the partnership's inner workings say.
Anything that has the potential to affect the Cingular brand is fair game for discussion, from marketing campaigns to pricing and network investments.
SBC's pricing in the post-AT&T world is expected to be aggressive. With its massive revenue base, SBC thinks it can make up the difference in volume over time. SBC and BellSouth have veto rights over each other's pricing and marketing plans for Cingular products.
It remains to be seen if BellSouth, always concerned about short-term performance, will approve.
The most ticklish problem for Cingular, potentially, is branding.
SBC plans to use the AT&T brand, one of the most recognized in the world, to market all of its products — including Cingular.
SBC claims it can market Cingular's services under any name it chooses, including AT&T. BellSouth, for now, isn't arguing. But that could change when SBC formally makes its move.
The whole messy situation has inspired a new nickname for BellSouth: Poland. The reference is brutal — Poland was stormed by Germany in the fall of 1939. The invasion strategically isolated Poland and ignited World War II.
The nickname was born in the wake of the Cingular-AT&T Wireless deal. It has lately been making the rounds at big telecom carriers, including AT&T, which attempted — and failed — to engineer a merger with BellSouth in 2003.
Ackerman isn't amused. "I won't dignify that with an answer," he says, referring to the Poland remark. "But if you ask me if I feel like we are cut off strategically, the answer is no."
Happy not to play merger game
He's also not sorry about sitting out the merger dance. Big mergers, he notes, are fraught with risk.
Indeed, history is littered with examples of big mergers gone awry, such as AT&T's acquisition of computer giant NCR and AOL's purchase of Time Warner.
Uncertainty about the future of telecom has left some investors cold. Lingering questions about the rise of substitution services, such as wireless and VoIP, have only added to telecom's financial pain.
Unsure about when, or even if, SBC's spending spree will yield results, investors have lately driven down its stock price to a 52-week low. Over the past year, BellSouth's stock has lost less ground than either SBC or Verizon. But that is hardly a standing ovation for its think-small corporate strategy.
Neither CEO will be sticking around long enough to find out who was right. Appointed CEO in 1996, Ackerman, 63, is due to retire by May 2007. Whitacre, SBC's CEO for 18 years, is expected to step down by November 2006.
To hear Ackerman talk, BellSouth has all the assets it needs to compete in the future. The carrier, he notes, has 21 million local phone lines, a healthy long-distance business and more than 2.4 million Internet access customers. In addition to its big stake in Cingular, it has a prodigious Yellow Pages business.
Video is another area of pride.
Unlike SBC and Verizon, he says, BellSouth isn't spending billions of dollars on newfangled video plans that might not pan out. SBC is constructing an "IPTV" — Internet Protocol TV — network; Verizon is running fiber straight to the home.
Ackerman says BellSouth has been studying its video options for more than two years now, trying to find a business model that won't disrupt its "metrics" — BellSouth-speak for profit margins, revenue, stock price and other financial benchmarks. The carrier is testing IPTV. But Ackerman says he's not convinced it is economic to deploy.
For the time being, he says, BellSouth is content to offer DirecTV to its customers. BellSouth doesn't make any profit off the DirecTV arrangement; all the money goes to DirecTV. But it doesn't incur any costs, either, so it's risk free.
Ackerman says he's happy to be a video follower so he can learn from SBC's and Verizon's mistakes.
"Is there an advantage to not being on the bleeding edge" of video, Ackerman says, a slight smile creasing his lips. "Could be."
All of which is a neat segue back to the chairman's favorite subject: BellSouth's metrics. They blow the doors off everybody, he says.
"We may have given up some scale" by passing on deals, Ackerman says, winding up for his punch line. "But nobody has outperformed us."
Asked to talk about BellSouth's prospects, he quickly retreats to a familiar place: the past.
"What metrics suggest we are behind?" Ackerman demands. He never does answer the question about BellSouth's future.
Ackerman won't talk about his discussions with Whitacre. (The SBC chief, through a spokesman, declined to comment for this article.) As for all the talk about rising tensions between SBC and BellSouth, well, that's just part of the give-and-take of any healthy business partnership, Ackerman says.
Says Ackerman: "All the metrics tell me we're doing just fine."
http://www.usatoday.com/tech/news/techpolicy/business/2005-10-31-bellsouth-mergers_x.htm
Cingular, owned by BellSouth and SBC, had just bought AT&T Wireless for $41 billion. The deal, which was largely negotiated by Whitacre, turned Cingular into the USA's No. 1 cellphone carrier overnight.
Whitacre thought it made sense for SBC and BellSouth to merge. By combining, he argued, the two carriers could streamline Cingular's management and create a formidable competitor for the coming war with cable TV.
Ackerman wasn't interested. But he did have an idea: merge the assets of BellSouth and SBC to create three separately traded companies — a traditional phone company, representing the local and long-distance assets; a wireless business; and Yellow Pages. By going that route, Ackerman pressed, SBC and BellSouth could create immediate value for shareholders.
Whitacre took a pass. Then he turned on a dime and went after AT&T. People with direct knowledge from both companies confirm the story's details, but declined to be quoted by name because of company policies that prohibit public comments on business proposals.
Ackerman's dealmaking conservatism is about to come back and bite him.
On Monday, the Federal Communications Commission gave its blessing to the acquisitions of AT&T and MCI by SBC and Verizon, respectively. The two deals will turn SBC and Verizon into formidable global competitors. The new companies will overshadow BellSouth, which has not been nearly as aggressive in creating a battle plan to carry it into the future. (Related item: Telecom mergers get FCC's blessing)
One little-discussed aspect of the SBC-AT&T deal is its impact on Cingular. Once the AT&T merger closes, BellSouth will be in the unenviable position of having to compete against its wireless partner. SBC — which intends to rename itself AT&T — plans to storm BellSouth's Southeastern territory soon after the merger. Verizon has a similar plan.
Can the Cingular marriage survive in the post-AT&T world?
Ackerman, in an interview, insists the Cingular partnership is strong. "This one is big enough that neither one of us can afford to let it fail," he says.
Part of that, he says, is owing to the huge stakes on the table. BellSouth gets 40% of its revenue from Cingular; SBC gets about a third.
Some analysts have a different view of the venture's future.
"I think it's going to dissolve," says Lisa Pierce of Forrester.
Elroy Jopling of Gartner Group thinks Cingular can last for two years — tops — in its current form. "You're basically looking at 18 months or so before Cingular turns ugly from a decision-making basis," he says.
BellSouth's larger problem, analysts say, is its think-small strategy.
Based in Atlanta, BellSouth sat out the merger dance of the 1990s. As a result, it still serves the same nine states that it did in 1984 when the AT&T phone monopoly was broken up by court decree. Back then, BellSouth was the largest of the Bells. Today it is among the smallest, with about $28 billion in revenue in 2004.
By year's end, SBC — an amalgam of Southwestern Bell, Pacific Telesis and Ameritech — will dominate the western USA. Verizon — a combination of Bell Atlantic, Nynex and GTE — will dominate the East. Once the AT&T deal closes, SBC will become the USA's largest telecom, with about $110 billion in annual revenue. Verizon, with $90 billion in annual revenue, will become No. 2.
With AT&T and MCI in their pockets, SBC and Verizon will instantly gain the ability to reach all 50 states. They'll also be able to court business customers, touting global services that BellSouth can't easily offer and aggressive prices it may not be able to match profitably. Over time, they are likely to go after residential customers as well.
Cable companies also are taking aim. Comcast, Time Warner and other cable operators are rapidly adding VoIP — Voice over Internet Protocol — to their service bundles. By 2008, some analysts predict there will be more than 40 million VoIP subscribers. The assault is one reason the big carriers are losing about 5% of their basic phone subscribers each year. Those losses are expected to accelerate over time.
Phone companies, eager to blunt their losses, are returning fire by adding video to their lineups.
Once the competitive rumble gets going, BellSouth will quickly feel the heat, says Jan Dawson, an analyst for Ovum in Boston. "BellSouth's profit margins will be squeezed and squeezed and squeezed until there is potentially nothing left," he says.
Future in question
The coming communications war has convinced some analysts that BellSouth's future as an independent company is uncertain.
Blair Levin, of Legg Mason Wood Walker, says he wouldn't be surprised to see BellSouth get picked off — probably by SBC — soon after the AT&T deal closes.
Pierce agrees: "They'll merge with somebody," she says flatly.
But first BellSouth and SBC will have to figure out Cingular's future. That might not be easy, or cheap.
Cingular's biggest problem, by far, is the management structure. SBC and BellSouth split revenue 60-40, but management decisions are shared equally.
In practice, that means SBC and BellSouth can't make a move without the blessing of the other, people with direct knowledge of the partnership's inner workings say.
Anything that has the potential to affect the Cingular brand is fair game for discussion, from marketing campaigns to pricing and network investments.
SBC's pricing in the post-AT&T world is expected to be aggressive. With its massive revenue base, SBC thinks it can make up the difference in volume over time. SBC and BellSouth have veto rights over each other's pricing and marketing plans for Cingular products.
It remains to be seen if BellSouth, always concerned about short-term performance, will approve.
The most ticklish problem for Cingular, potentially, is branding.
SBC plans to use the AT&T brand, one of the most recognized in the world, to market all of its products — including Cingular.
SBC claims it can market Cingular's services under any name it chooses, including AT&T. BellSouth, for now, isn't arguing. But that could change when SBC formally makes its move.
The whole messy situation has inspired a new nickname for BellSouth: Poland. The reference is brutal — Poland was stormed by Germany in the fall of 1939. The invasion strategically isolated Poland and ignited World War II.
The nickname was born in the wake of the Cingular-AT&T Wireless deal. It has lately been making the rounds at big telecom carriers, including AT&T, which attempted — and failed — to engineer a merger with BellSouth in 2003.
Ackerman isn't amused. "I won't dignify that with an answer," he says, referring to the Poland remark. "But if you ask me if I feel like we are cut off strategically, the answer is no."
Happy not to play merger game
He's also not sorry about sitting out the merger dance. Big mergers, he notes, are fraught with risk.
Indeed, history is littered with examples of big mergers gone awry, such as AT&T's acquisition of computer giant NCR and AOL's purchase of Time Warner.
Uncertainty about the future of telecom has left some investors cold. Lingering questions about the rise of substitution services, such as wireless and VoIP, have only added to telecom's financial pain.
Unsure about when, or even if, SBC's spending spree will yield results, investors have lately driven down its stock price to a 52-week low. Over the past year, BellSouth's stock has lost less ground than either SBC or Verizon. But that is hardly a standing ovation for its think-small corporate strategy.
Neither CEO will be sticking around long enough to find out who was right. Appointed CEO in 1996, Ackerman, 63, is due to retire by May 2007. Whitacre, SBC's CEO for 18 years, is expected to step down by November 2006.
To hear Ackerman talk, BellSouth has all the assets it needs to compete in the future. The carrier, he notes, has 21 million local phone lines, a healthy long-distance business and more than 2.4 million Internet access customers. In addition to its big stake in Cingular, it has a prodigious Yellow Pages business.
Video is another area of pride.
Unlike SBC and Verizon, he says, BellSouth isn't spending billions of dollars on newfangled video plans that might not pan out. SBC is constructing an "IPTV" — Internet Protocol TV — network; Verizon is running fiber straight to the home.
Ackerman says BellSouth has been studying its video options for more than two years now, trying to find a business model that won't disrupt its "metrics" — BellSouth-speak for profit margins, revenue, stock price and other financial benchmarks. The carrier is testing IPTV. But Ackerman says he's not convinced it is economic to deploy.
For the time being, he says, BellSouth is content to offer DirecTV to its customers. BellSouth doesn't make any profit off the DirecTV arrangement; all the money goes to DirecTV. But it doesn't incur any costs, either, so it's risk free.
Ackerman says he's happy to be a video follower so he can learn from SBC's and Verizon's mistakes.
"Is there an advantage to not being on the bleeding edge" of video, Ackerman says, a slight smile creasing his lips. "Could be."
All of which is a neat segue back to the chairman's favorite subject: BellSouth's metrics. They blow the doors off everybody, he says.
"We may have given up some scale" by passing on deals, Ackerman says, winding up for his punch line. "But nobody has outperformed us."
Asked to talk about BellSouth's prospects, he quickly retreats to a familiar place: the past.
"What metrics suggest we are behind?" Ackerman demands. He never does answer the question about BellSouth's future.
Ackerman won't talk about his discussions with Whitacre. (The SBC chief, through a spokesman, declined to comment for this article.) As for all the talk about rising tensions between SBC and BellSouth, well, that's just part of the give-and-take of any healthy business partnership, Ackerman says.
Says Ackerman: "All the metrics tell me we're doing just fine."
http://www.usatoday.com/tech/news/techpolicy/business/2005-10-31-bellsouth-mergers_x.htm
