article

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

Links
BellSouth Corp. www.bellsouth.com
AT&T Corp. www.att.com


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