1) A Reborn AT&T To Buy BellSouth $67 Billion Deal Sets Field For a Race With Cable Over Phones and TV 'An Explosion of Technology' By DIONNE SEARCEY, AMY SCHATZ, ALMAR LATOUR and DENNIS K. BERMAN Staff Reporters of THE WALL STREET JOURNAL March 6, 2006; Page A1
A $67 billion deal to buy BellSouth Corp. puts AT&T back on top of the telephone industry -- but this time, it is just one of many rivals in a high- technology race to dominate telecommunications, television and the Internet. Yesterday, AT&T Inc. said it has agreed to acquire BellSouth, aiming to create a super- size phone company that reunites four of the Baby Bells created in the historic 1984 breakup of Ma Bell. It will boast a market capitalization of as much as $170 billion, larger than any other telecommunications operator in the world. The deal's terms also require AT&T to assume $22 billion in debt. But AT&T's new marketplace would be unrecognizable to old Ma. The once- rigid boundaries between local service, long-distance, TV and online have been obliterated by technology. Phone companies are trying to offer TV services. Cable operators and upstart Internet companies are successfully selling phone services. Internet technology is even spreading to the wireless world, the main source of growth for most phone companies. With the communications industry a free-for-all, prices and profit margins are under massive pressure, and the race is on to snare as many customers as possible with packages offering phone, wireless, Internet and TV. AT&T wants to grab the 14 million consumers and six million business phone lines served by BellSouth, of Atlanta. The extra scale will be particularly helpful to AT&T as it pushes into the new terrain of TV and Internet phone service. At BellSouth, 85% of residential customers are capable of receiving high-speed Internet, over which AT&T will try selling TV and other services. "When you go back to the early 1980s, we were talking about a single product," said Duane Ackerman, BellSouth's chief executive, in an interview yesterday. "Since then there has been a tremendous explosion of technology. It changed everything." The new AT&T will combine BellSouth's nine-state territory, which stretches from the Mississippi River to the Atlantic, with the old AT&T's customers on the West Coast, in the Southwest and Midwest, as well as businesses around the world. [F. Duane Ackerman] Consumer groups already have said they will oppose the deal, having long argued that consolidation in the phone industry reduces competition and raises prices. Still, some customers may benefit. AT&T's high-speed Internet service is significantly less expensive than that of BellSouth and AT&T has been more aggressive in rolling out television services. Consumers in BellSouth's region will likely see these new services sooner than if their provider remained the more cautious BellSouth. The recent history of AT&T in its many incarnations underscores an extraordinary transformation in telecommunications. Rarely has a single industry seen so many deals -- and more are now expected -- in response to competition and rapid technological change. The U.S. government broke up AT&T, then a monopoly, in order to create a more competitive industry. That yielded seven regional local phone companies and a long- distance company, which kept the original AT&T moniker. In the late 1990s, competition raged after long-distance and local companies started entering each other's territory. Telephone operators started merging, driven primarily by Edward Whitacre, the man who eventually became the architect of the new AT&T Inc. Mr. Whitacre started out in 1963 as a facility engineer with Southwestern Bell Telephone Co. in Lubbock, Texas. After climbing the corporate ladder, the Texan took his company from the smallest Bell to a leading regional player, acquiring Pacific Telesis, Ameritech and Southern New England Telecommunications. [Edward Whitacre Jr.] AT&T, meanwhile, had decided in the late 1990s that its future lay in cable. Under C. Michael Armstrong, it made a $100 billion bet on that technology just as the long- distance market collapsed amid competition from cheap upstarts, affordable wireless plans -- and fraudulent accounting by rival WorldCom. Without enough cash for debt and operations, Mr. Armstrong was forced to break the company into a wireless operation and a separate phone company, named AT&T Corp., and to sell the cable lines to Comcast Corp ., Philadelphia. Two years ago, with the threat growing from Internet and cable companies, the industry's deal-making accelerated. The leading remaining Bells -- BellSouth, Mr. Whitacre's SBC Communications Inc. and Verizon Communications Inc., of New York -- began gobbling up assets. BellSouth talked to both AT&T and SBC but didn't reach an agreement with either. In 2004, SBC acquired AT&T Wireless, outmaneuvering the United Kingdom's Vodafone Group PLC, which at the eleventh hour also made a bid. The deal instantly made Cingular, owned by SBC and BellSouth, the largest wireless operator in the country. Days after that deal was signed, Mr. Whitacre set out to acquire a long-distance company, first targeting MCI Inc. and then AT&T Corp. SBC succeeded in snaring AT&T and this year gave itself the storied name. Mr. Whitacre is nearing retirement, and the market had been anticipating one last hurrah. A BellSouth acquisition has long been the subject of speculation by analysts, investors and rivals. The deal came together in about five weeks, with the two sides holding the bulk of their negotiations at the offices of law firm Sullivan & Cromwell in midtown Manhattan. "We've talked about this on and off for years," Mr. Ackerman said. "Only in the last couple months did we get specific." The agreement's size is impressive: It is the fifth-largest U.S. deal ever, based on equity values, according to Dealogic, a markets data provider. Still, given telecommunications firms' poor track record of moving into new markets, there is no assurance the combined company will offer a better array of services than each side would have done alone. Nor is there any telling what new and unexpected competitors might be thrown up as communications technologies becomes cheaper and more widespread. Cable operators have taken a clear lead in the race to offer a bundle of TV, phone and Internet services. Cable operators have been aggressively launching phone service using Internet technology and added more than 600,000 subscribers in the fourth quarter for a total of more than five million customers at the end of last year, according to Leichtman Research Group Inc., a technology research group in Durham, N. H. More than 55 million homes can now get phone service from their cable company. [Caller ID] By contrast, telephone companies offer TV to fewer than one million homes and have fewer than 10,000 subscribers, not including their marketing arrangements with satellite operators, according to Leichtman. "With our aggressive rollout of digital phone service this year we expect to maintain and grow our competitive advantage over the bells," said D'Arcy Rudnay, a spokeswoman for Comcast, the nation's largest cable operator. The deal is sure to spark reactions from other telecommunications players. Verizon, previously the top company ranked by market capitalization, would be dwarfed by the new AT&T. It already has said it wants to buy the stake in Verizon Wireless held by Vodafone and will likely up the ante to get that done. The company also is interested in making an approach for Alltel Corp., a regional wireless company in Little Rock, Ark., say people familiar with the situation. Mr. Whitacre yesterday tried fending off potential regulatory concerns. "There will be some who say we're putting the Bell system back together," he said in an interview. "But this is a different world." The AT&T-BellSouth deal and Verizon's acquisition of MCI were approved with a few minor conditions attached, despite concerns they would lead to higher prices for business customers. The combination of AT&T and BellSouth is designed to shore up both companies' defenses against cable operators and other competitors. Internet technology has allowed start-up companies such as Vonage Holdings Corp. and eBay Inc.'s Skype Technologies to offer phone service without owning their own networks, driving rates for calls to as low as zero. Vonage has signed up 1.5 million customers in the past two years, and Skype has more than 50 million users world-wide. Even Internet search companies such as Google Inc., Mountain View, Calif., and Yahoo Inc., Sunnyvale, Calif., have joined the fray with Internet-based chat services. The deal also will lead to significant cost savings, as the three networks belonging to AT&T, BellSouth and Cingular are merged into one, giving the combined entity more leverage over vendors such as equipment providers. AT&T says it expects to find about $2 billion a year in cost savings. People familiar with the situation said AT&T is considering shedding about 8,000 jobs. Acquiring BellSouth will give AT&T full control of Cingular Wireless, the nation's largest wireless carrier. Not only is wireless the fastest growing part of the telecommunications industry, but it also is at the forefront of many new services, such as wireless broadband access for laptop computer users. Having one owner could help Cingular quickly roll out new services and to integrate the sales and marketing of the new company's regular and wireless offerings, which will likely be sold under the AT&T brand. Eventually, AT&T and Cingular could offer advanced options such as a single voice-mail service for both types of phones or the ability to transfer video content from TVs to cellphones, says Julie Ask a research analyst at Jupiter Research. For years, BellSouth has operated as a kid brother to Mr. Whitacre's much larger, faster-moving company. At BellSouth, Mr. Ackerman, who is slated to retire next year, has focused on returning dividends to investors rather than spending money on innovations. As a result, BellSouth has lagged behind AT&T as it tries to find a home for itself in the future of telecommunications. BellSouth has been slow to pursue a television rollout, unsure about the potential payoff and the high investment, while AT&T and Verizon already have announced plans to include television as part of their package. BellSouth's only TV offer has been through a marketing alliance with the satellite-TV operator, DirecTV Group Inc., El Segundo, Calif. BellSouth also hasn't fully embraced a relationship it has with Yahoo. Meanwhile, AT&T has entered deals with the Internet company to create a mobile phone, among other services. BellSouth also has resisted deep price cuts in its high-speed Internet service. AT&T, by contrast, was the first major phone company to drop monthly fees to less than that of slower dial-up services. [Bells Unite] In the wake of the merger, AT&T will push its TV services into BellSouth's systems. AT&T has a venture with EchoStar Communications Corp., Englewood, Colo., the other major satellite operator, dubbed HomeZone. HomeZone plans to introduce a new set-top box that will enable consumers to get both satellite-TV and movies, programs and other content via the Internet. AT&T invested $500 million in EchoStar in 2003 and some investors speculate EchoStar may be a future AT&T acquisition target. Longer term, AT&T plans to sell TV services on its own network using technology it claims will enable the company to offer features and content beyond the reach of cable operators. AT&T has begun a "controlled launch" of that service in San Antonio and plans to begin offering it more widely in the next six months or so. Neither of AT&T's two TV strategies have fully proven themselves so far. The launch of HomeZone, originally scheduled for the end of last year, has been delayed at least six months because of problems integrating the satellite and Internet services. Some experts also are skeptical about AT&T's Internet-based TV offerings, citing growing pains and the telecommunications industry's poor track record in this field. Under the terms of the proposed deal, news of which was first reported by The Wall Street Journal Online, shareholders of BellSouth will receive 1.325 shares of AT&T common stock for each BellSouth common share. Based on AT&T's closing stock price on March 3, that equals $37.09 a BellSouth common share, or nearly an 18% premium over BellSouth's closing stock price. The total equity consideration is valued at about $67 billion. AT&T's Mr. Whitacre will serve as chairman and chief executive of the new company. His contract expires in November when he turns 65, but AT&T said the board asked him to stay on until March 2008 to shepherd the acquisition and he agreed to do so. Mr. Ackerman of BellSouth will be chairman and chief executive of his company's operations. Mr. Ackerman said he would stay on for a short time after the takeover until his retirement. Three members of the BellSouth board will join the AT&T board. The corporate headquarters will be in San Antonio, where AT&T is currently based. AT&T's board also authorized a share repurchase plan of 400 million shares through 2008. Under this plan, the company expects to buy back at least $10 billion of its common shares in the next 22 months. AT&T expects to repurchase $2 billion this year and $8 billion next year. AT&T was advised by Lehman Brothers Holdings Inc., New York, Evercore Partners, Rohatyn Associates and law firm Sullivan & Cromwell. BellSouth was advised by Citigroup Inc., Goldman Sachs Group Inc., New York, and law firm Fried, Frank, Harris, Shriver & Jacobson. 2) AT&T Deal Could Speed Move To Wireless Internet Calling By AMOL SHARMA and LI YUAN March 6, 2006; Page B1 AT&T Inc.'s planned acquisition of BellSouth Corp. could help the combined telecom company push ahead with plans to offer a burgeoning service for consumers: the ability to make Internet calls using a cellphone. Internet calling has already taken off in the landline world, allowing millions of customers to save money by having their phone calls travel through the Internet instead of telephone landlines. Now, phone companies, wireless carriers, cable companies and start-ups are all developing services that will enable cellphone calls to travel over the Internet as well. As part of the system, a single handset would function as a cellphone on the road but could route calls over the Internet when in range of wireless high-speed Internet networks, or Wi-Fi, at home or in public "hot spots" such as airports, hotels, and coffee shops. Manufacturers like Nokia Corp. and Motorola Inc. have already introduced handsets that can do this, but neither said when the phones will be available in the U. S. BELLS UNITE The new technology could make Internet calling more appealing to a much broader market because existing Internet phones can't double as cellular phones as the new hybrid phones would. AT&T's intended acquisition of BellSouth, announced yesterday, must still be approved by regulators. Cingular Wireless, the largest U.S. cellphone service provider and currently a joint venture of AT&T and BellSouth, says it is exploring technologies to offer a hybrid phone that would use the Internet networks of AT&T and BellSouth. In the short run, the logistics of an AT&T-BellSouth merger could complicate Cingular's plans. But in the long term, integrating the two phone companies' billing and customer service could make it even easier to integrate the landline networks with wireless services, analysts say. In general, "having one owner makes governance simpler, and makes decision-making simpler," says Mark Siegel, a spokesman for Cingular. Cingular says it hasn't decided when it will roll out the service and whether to allow it to work for customers with high-speed Internet connections provided by companies other than its parent companies. Other companies have been more aggressive than Cingular on Internet calling. T-Mobile USA Inc. has already kicked off a limited trial of an Internet calling service in Seattle and is expected to roll out a commercial offering later this year, people familiar with the trials say. A joint venture of Sprint Nextel Corp. and the country's largest cable companies is planning to offer combined Internet-cellular phones next year. The move is risky for wireless operators, since consumers using such services might want to buy fewer cellular voice minutes if they can use their phones on the Internet at lower cost. Already, Internet calling services offered by start-ups such as Vonage Holdings Corp. and cable operators have lured millions of subscribers away from traditional telephone companies and driven prices down. Some companies, including eBay Inc.'s Skype, even allow their subscribers to call each other for free. All players are moving ahead despite the risks: T-Mobile and Sprint, both pure cellular carriers, see the new technology as an opportunity to steal customers from landline companies and their bigger wireless competitors, people in the industry say. Switching calls over to the Internet will also allow carriers to expand their coverage inside homes and office buildings, where signals are weak, and to free up capacity on their cellular networks. Also, analysts expect carriers could charge a premium of $5 to $10 per month for the service. Cable companies, which have been aggressively rolling out Internet telephony on their broadband networks, see the move as a way to enter the wireless sector without acquiring expensive radio spectrum and building their own networks. The move to bring Internet calling to cellular networks is another sign of intense competition in the telecom sector. Cable and phone companies are racing to offer consumers the most attractive bundle of TV, phone, wireless and high- speed Internet services, collapsing the traditional borders between these industries. "They all want to be the company to deliver movies and content to your house, be your wireless provider and deliver your Internet and phone service," says Jupiter Research wireless analyst Julie Ask. "They want to do it all." Industry officials and analysts expect demand for the wireless Internet phone service to be strong: There is a large market to tap, given that more than 35% of Americans now have broadband connections, according to a recent survey by the Yankee Group. Still, there are a number of hurdles for companies hoping to offer wireless Internet calling: The handsets that operate on both cellular and Wi-Fi networks are still expensive, ranging from $700 to $1,000, though cheaper models are expected this year. Also, switching instantly between the two networks has proved technically challenging. And some carriers worry they will inherit the regulatory burdens of Internet phone providers, which have had difficulty meeting a government mandate to offer emergency 911 services that can track a caller's location. Carriers in Europe and Asia recently began taking steps to deploy wireless Internet calling. British Telecom PLC launched a mobile Internet service last summer that allows calls to switch between cellular and home Wi-Fi networks. Skype has also just struck a deal to offer the service to customers of Hutchinson Whampoa Ltd.'s telecom unit 3 later this year in Europe, Asia and Australia. In the U.S., cellular Internet phone service has yet to emerge, but Internet-based calling has already proven popular. Roughly six million U.S. consumers have signed up for Internet phone service from cable companies, Internet service providers or independent carriers such as Vonage, according to a recent survey by the Pew Internet and American Life Project. Many consumers have gravitated to the services because they offer cut- rate calling plans compared to traditional phone companies. Rather than sending calls over the public- switched telephone network, Internet calls are broken into digital packets of data that are routed via the Internet, similar to how emails are delivered. Some phone makers like Panasonic Corp. and Motorola have produced cordless handsets that allow consumers to make and receive Internet calls. Other companies, such as SpectraLink Corp., have targeted similar devices at businesses, giving workers the ability to roam around an office building and talk on an Internet phone. But those devices only work on Internet connections and do not also function as a cellphone. Now several U.S. carriers and handset manufacturers are lining up to bring consumers devices that can operate on both types of networks and switch seamlessly between the two. Sprint says it is planning to roll out the offering with cable companies in the first half of 2007, taking advantage of the Internet phone technology many large cable companies have already developed for their high-speed Internet customers. The service will probably add a few dollars to consumers' phone bills. "We think it's a premium service, and so it probably would have a premium price," says John Garcia, head of Sprint's venture with the cable companies. Sprint could also develop its own Internet phone technology and offer wireless Internet calling without the help of cable providers in some cases, a person familiar with the company's plans says. T-Mobile has the most to benefit from offering wireless Internet calling, many analysts say. With a fast-growing subscriber base and limited network capacity, the company is eager to transfer some voice traffic to the Internet. T-Mobile also can take advantage of its large network of Wi-Fi hotspots in public places. Verizon Wireless is also evaluating wireless Internet calling technologies but hasn't announced any plan to deploy the service. People in the telecom industry said the company has found significant interest for the service from its business customers. "When and if the marketplace is ready, we'll be ready," spokesman Tom Pica says. The carriers are also reaching out to other companies, such as Kineto Wireless Inc., Airvana Inc., BridgePort Networks Inc. and VeriSign Inc., for the technical infrastructure and software needed to merge cellular and Wi-Fi networks. Kineto Vice President of Marketing Ken Kolderup says the company had to do a lot of "evangelizing" with the wireless operators two to three years ago, but now they're knocking on his door. Companies that provide broadband Internet calling over traditional phones, such as Yahoo Inc. and Time Warner Inc.'s AOL are also exploring ways to get into the cellular Internet calling market. Skype is already offering Internet-calling software that consumers can download onto their personal digital assistants and other wireless data devices. But some carriers could make life difficult for the smaller players: Cingular and Verizon Wireless prohibit wireless broadband subscribers from using Internet phones over their data networks because they say the services could hog bandwidth. Some companies, such as EarthLink Inc., are hoping to compete with the large wireless carriers by taking advantage of the Wi-Fi networks many municipalities are building. EarthLink, which is planning to offer city-wide Wi-Fi access in Philadelphia and has bid for a similar project in San Francisco, said it will eventually offer a handset that allows consumers to make Wi-Fi calls that can switch to the cellular network of Helio, a joint venture between EarthLink and South Korean wireless carrier SK Telecom Co. The biggest challenges for the carriers and cable companies interested in deploying wireless Internet calling are technical. Transferring calls smoothly between the two networks is "quite an engineering feat," says Mr. Garcia of Sprint, as is determining which Wi-Fi access points are secure enough to pick up cellular calls. Sprint says the first phase of its rollout will only allow calls to be transferred to the Internet at home. Write to Amol Sharma at [EMAIL PROTECTED] and Li Yuan at li. 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