2 Baby Bell companies announce surprise merger SBC, PacTel are first to act under new law

April 02, 1996|By Michael Dresser | Michael Dresser,SUN STAFF

A full-scale realignment of the nation's telecommunications industry got under way yesterday as SBC Communications Inc. and Pacific Telesis Group, two of the seven regional Bell companies created in the breakup of AT&T Corp., said they would merge.

The surprise deal was the first big merger enabled by this year's new telecommunications law. It would create the nation's second-largest telecommunications company, with more than 100,000 employees and annual revenues of $21 billion. Its

territory would include the nation's two most populous states, California and Texas.

The merger agreement sends the message that the floodgates are open for the torrent of deals expected to flow from the passage of the Telecommunications Act of 1996 in February.

"This is just the first of what you're going to see in the next 12 months to 18 months," said Mark Langner, senior analyst with TeleChoice Inc. in Verona, N.J.

Telecommunications industry analysts have long expected a merger of regional Bell companies to follow soon after passage of a new telecommunications law, but the identity of the first merger partners came as a surprise. Industry speculation had centered around a merger of Bell Atlantic Corp. and Nynex Corp., which have been holding on-and-off talks for months.

"This would make it more likely that Bell Atlantic and Nynex might merge, but it does not make it imperative that Bell Atlantic and Nynex will merge," said Peter Krasilovsky, senior consultant at Arlen Com- munications in Bethesda.

Jay Grossman, a Bell Atlantic spokesman, was noncommittal about the merger's effect on Bell Atlantic's plans.

"I don't know if there is any real direct effect," he said. "It's just a function of the environment today."

SBC will be the surviving company in the $17 billion stock-swap transaction. Its San Antonio headquarters will house the corporate offices of the combined company. Its chief executive officer, Edward E. Whitacre Jr., will become chairman and CEO, while PacTel CEO Philip J. Quigley will be vice chairman.

In a national teleconference yesterday, the two executives hailed the merger agreement as a victory for both companies. Mr. Whitacre called it "a great day for two great companies," and Mr. Quigley said PacTel had found precisely the partner it wanted.

"There's nobody even a close second to SBC in my mind. They've got terrific management," Mr. Quigley said.

On Wall Street, traders signaled that the deal was highly favorable for PacTel shareholders. The San Francisco-based company's stock rose $6 to close at $33.75, while SBC stock dropped $2.75 to close at $49.875.

Mr. Whitacre sidestepped questions about how many employees might lose their jobs as a result of the merger. "The union of these two companies is not about layoffs. This is about growing the enterprise," he said.

The two executives said the merger will make the combined company a much more formidable competitor in the long-distance market and in global markets than either of the partners could be on its own.

PacTel serves California and Nevada. SBC, which is still better known by its former name of Southwestern Bell, serves Texas, Oklahoma, Arkansas, Kansas and Missouri.

The merger will bring together two companies that have taken vastly different approaches to the marketplace in recent years. PacTel, with about $9 billion in annual sales, is known as a technological leader but a laggard in terms of profitability. It has taken an aggressive position toward deployment of high-capacity digital phone lines and is planning to offer 125 channels of TV programming in California through a technology known as "wireless cable."

SBC, with $12.6 billion in sales last year and the highest rates of return in the industry, is regarded as a conservatively managed company that eschews high-technology gambles and fiercely defends its territory from encroachment by competitors.

At the same time, it has not been shy about invading the territory of other regional Bells. Its wireless subsidiary, which uses the brand name Cellular One in the Baltimore-Washington area, is the chief adversary of Bell Atlantic Nynex Mobile in this region.

"Southwestern Bell might be considered more of a tortoise," Mr. Krasilovsky said. "PacTel might be more of a hare."

One question yet to be answered is how the companies will resolve an apparent conflict in their efforts to get into the television programming business. SBC is a partner with two other regional Bells in Americast, a venture allied with Disney Corp., while PacTel is a partner along with Bell Atlantic and Nynex in a rival company called Tele-TV.

"Something's got to give," Mr. Krasilovsky said. Mr. Whitacre and Mr. Quigley said no decision has been made about the combined company's video plans.

In their announcement, the companies made a conspicuous effort to smooth any bruised feelings that could result from the absorption of California's largest telephone company by its Texas-based counterpart.

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