Industry hangs on for the ride

Mergers announced in '98 will have big effect on business this year

January 24, 1999|By Mark Ribbing | Mark Ribbing,Sun Staff

The telecommunications industry has emerged as a major engine of economic growth, both in Maryland and nationwide. Executives and analysts say continuing expansion of the telephone, Internet and cable television markets will be accompanied by more of the breakneck change that has reshaped the whole sector.

Jeffrey Kagan, a telecommunications analyst in Atlanta, said this year "for the most part will be just like 1998, just a bit faster."

The poster child of the industry's keep-up-or-die ethos is Ciena Corp. The Linthicum network equipment maker entered 1998 as one of the nation's most promising high-technology firms but then suffered a year of poor earnings reports, dizzying stock declines and the scrapping of a $7 billion merger with Tellabs Inc. The company hopes for a recovery this year.

Ciena President and Chief Executive Officer Patrick H. Nettles said it is "likely" that Ciena will resume its earlier practice of buying smaller companies but said his own company is not on the block: "We're focusing on running our business. We're not looking to sell our company or merge."

Mergers are very much on the minds of the big national companies that dominate local and long-distance telephone service. This year will see federal regulators grappling with three huge deals announced in 1998: SBC Communications Inc.'s $62.5 billion purchase of fellow Baby Bell Ameritech Corp.; Bell Atlantic Corp.'s $52.9 billion acquisition of GTE Corp.; and AT&T Corp.'s $48 billion takeover of cable giant Tele-Communications Inc. (TCI).

Analysts say all three deals are likely to win approval this year and will help transform the industry. "[I]n telecommunications, the mergers are going to dominate," said Scott C. Cleland, an analyst with Legg Mason Precursor Group in Washington.

Also in the pipeline is the merger of two Maryland companies -- Lockheed Martin Corp.'s purchase of satellite communications company Comsat Corp. Lockheed Martin views the merger as a way to break into the blossoming telecommunications sector and diversify from its traditional status as a military hardware company. The two Bethesda companies hope the $2.7 billion deal will close by the end of the year, but the acquisition faces unusual hurdles. Because Comsat was created by an act of Congress, the purchase of the company must be approved on Capitol Hill as well as by federal regulatory bodies.

State regulators will continue to grapple with the complex, high-stakes issue of how to increase competition in local telephone service. Bell Atlantic continues to dominate Maryland's local market, and Public Service Commission Chairman Glenn F. Ivey said true local competition "really hasn't gotten under way."

Ivey said he hopes to bring Bell Atlantic together with rival phone companies to settle the ground rules for competition.

It will not be easy to craft compromise. Bell Atlantic, like its fellow Bells, is barred from offering long distance in its service region until it satisfies federal requirements on opening its local market to competition. Bell Atlantic said it is fulfilling these requirements and plans to file this spring for permission to provide long-distance service in Maryland.

AT&T and other would-be competitors insist Bell Atlantic has done little to open Maryland's market and should not be allowed into long distance anytime soon.

John Langhauser, AT&T's vice president of government affairs for the mid-Atlantic region, said of Bell Atlantic: "Unless its rhetoric translates to real market-opening conditions, I find it hard to believe it will get permission to enter long distance next year."

Sherry F. Bellamy, the president and chief executive officer of Bell Atlantic-Maryland Inc., said rival phone companies and the PSC are unfairly trying to hobble her company. Bell Atlantic is suing to undo a November PSC decision that compels the company to make it easier for rivals to use its network.

"Maryland is not our most attractive place to invest at the moment because the [regulatory] climate's so bad," Bellamy said.

On the cable TV front, two companies doing business in Maryland plan to join forces in 1999. Comcast Corp. announced in December that it will seek to take over Prime Communications LLC and its Montgomery County market.

Cable customers nationwide may have to contend with further price increases after Congress lets price regulations end March 30. "Unless the cable industry's DNA changes, rates are going up," said Legg Mason's Cleland.

Looming over the telecommunications industry is the prospect of a downturn in the general economy, with a lingering global financial crisis and wild swings on Wall Street.

Many analysts and executives say the telecommunications sector has become so immense and so central to the global economy that it can ride out any trouble. This optimism is held not only by big businesses but by smaller companies that seek to fill ever-multiplying niches.

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