A Price Too High

Posted: 12/2003

A Price Too High

BellSouth Corp. and AT&T Corp. merger talks broke down in late October because BellSouth said the $19 billion price tag for the long-distance giant was too high. I have to admit I breathed a sigh of relief on this one. I thought the price was too high, too, but not for reasons of business valuation.

To me, the price was too high to the competitive telecom industry. AT&T is not only the largest long-distance company; its the largest CLEC. Seeing any RBOC  even BellSouth, which did not participate in the reverse mitosis of its sister Baby Bells  eat up the largest local service competitor and regain a dominant position in both local and long distance in one sweeping transaction would be too great a step backward. Its not just that the pairing of AT&T with an RBOC would take us uncomfortably close to 1984 (Greenes, if not quite Orwells). To put it bluntly, the competitive industry could not absorb the void left if AT&Ts voice  the most powerful of the lot  was to fade away.

However, with the RBOCs entering the long-distance industry throughout their regions, its doubtful this will be the last well see in the way of deals like this. The irony of it all, of course, is mega-mergers dont appear to work for anyone. At the company level, it has been proven time and again that mergers among giants miss their financial targets. Culture clashes, integration setbacks, evolving market conditions and the like consistently conspire to deny merging entities in the real world the theoretical benefits of the merger. Financiers call this phenomenon unrealized synergies and its so prevalent that merger and acquisition announcements usually include disclaimer language along the lines of if all synergies are realized. They rarely are.

At the consumer level, the public interest is not served by the merging of major competitors in any industry, period. Fewer competitors means reduced consumer choice, price pressure and the whole ball of wax. Would-be merger participants often invest heavily in public relations campaigns professing consumer benefits of their merger, but basic economics, common sense, and studies and opinions by consumer groups almost always point in the opposite direction.

As for the impact of megamergers in our industry, we already have working  or, depending on your viewpoint, broken  models as proofs of concept. Remember when Ameritech was the thorn in the side of all RBOCs because of its competitive compliance? Illinois was within months of becoming the first state to award long-distance authority to an RBOC when SBC, the leastcompliant RBOC, put an end to its headaches by taking out the renegade RBOC.

Now, years later, the state that was first in line and widely regarded as the model for competition sits as one of the last states to grant long-distance authority to the incumbent. And its because of a mega-merger. I cant recall the exact terms of this deal at the moment, but I know it was too high a price for the telecom industry.

KHALI HENDERSON

khenderson@vpico.com.
Editor in Chief