Cingular connects with AT&T Wireless

$41 billion takeover could provoke more mergers

February 18, 2004|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

The merger of AT&T Wireless and Cingular Wireless into the nation's largest cellular phone carrier is likely to spark more consolidation, better service and quality, but also higher prices for consumers in the future, experts said of the stunning $41 billion cash deal struck in the pre-dawn yesterday.

The combined Cingular-AT&T Wireless will have 46 million customers and revenue of more than $32 billion a year. Its digital network will serve 49 states and 97 of the top 100 wireless markets. The new company will exceed current industry leader Verizon Wireless, which has 37.5 million customers.

The merger, expected to take almost a year to complete, could bring huge benefits to existing AT&T Wireless and Cingular customers in the form of expanded coverage and improved service. But experts also warned yesterday that the companies' focus on consolidating and cutting costs in the short term could result in billing mistakes, outages, service disruptions or other customer service problems.

"We're going to continue to see more consolidation," said Peter Firstbrook, senior research analyst at META Group, an information technology advisory and consulting firm in Connecticut. "As the players upgrade their network to support more services, they're going to need to be bigger to pay for it.

"In the short term, what this does is allow Cingular the opportunity to bring their prices down to be more competitive with Verizon," Firstbrook said. "I think it will also be pretty confusing for their customers in the short term. There will be some integration hiccups."

The nation's other large wireless carriers, including Sprint PCS, T-Mobile USA and Nextel Communications, will likely ramp up efforts to stay competitive with the new company. A possible scenario could include more roaming deals or a possible merger between Verizon and Sprint because both operate on the same technology. It is also possible that the new Cingular-AT&T Wireless company could snap up T-Mobile, which operates on the same network technology, experts said.

In the highly competitive, relatively new wireless phone industry, consumers have benefited from an array of pricing deals and calling plans - while carriers have struggled with profitability. Greater consolidation will mean carriers could improve profitability. Also, consumers are likely to see fewer deals in the future.

"Down the road, I think it will mean less price competition if it gets down to less than four competitors," said Bill Hardekopf, chief executive of Cellupdate.com, a consumer information Web site. "Right now, there will be five, and I think consumers will reap the benefit of a very strong competitive industry."

In what analysts have described as the telecommunications' version of 1948's "Dewey Defeats Truman" headlines, many news organizations ran stories yesterday morning that reported AT&T Wireless was leaning toward a buyout offer from Vodafone Group PLC of Britain. On Monday evening, Vodafone said it was willing to raise its $38 billion cash bid for the Redmond, Wash., company, but a deal was not expected to be announced until yesterday morning at the earliest.

With no agreement in place, Cingular swept in with a final early Tuesday morning bid of $15 a share - far surpassing AT&T Wireless' stock price of $11.82 at the market close Friday. AT&T Wireless' stock price, which has steadily climbed with talks of a possible merger, closed at $13.78 a share yesterday on the New York Stock Exchange.

Vodafone did not match the offer.

"This is great news for America's wireless users," said Stan Sigman, president and chief executive officer of Atlanta-based Cingular. "This combination is expected to create customer benefits and growth prospects neither company could have achieved on its own, and will mean better coverage, improved reliability, enhanced call quality and a wide array of new and innovative services for consumers."

Analysts expect the combined company will likely cut $2 billion a year from its operational costs by 2006, partly by laying off thousands of employees. A larger, leaner company will also have the resources to improve its advanced wireless data services, offer more innovative products to consumers and move more quickly toward upgrading to so-called third-generation services that will allow for high-speed Internet access.

Subject to the approval of AT&T Wireless shareholders and federal regulatory authorities, the merger is expected to be completed as early as late this year. The transition could provide Verizon Wireless, with the highest customer satisfaction ratings among the current six carriers, enough time to catch up and pass the new giant, analysts said.

Merging AT&T Wireless with Cingular - a joint venture of SBC Communications Inc. and BellSouth Corp. - could pose other problems. AT&T Wireless has experienced several difficulties over the past year, including service disruptions when it switched to a new network. A new federal rule that allowed wireless consumers to switch carriers and keep their cell phone numbers also caused the company to lose customers.

Last quarter, Cingular and AT&T Wireless added a combined 770,000 subscribers, while Verizon Wireless added 1.5 million. Some expect Verizon Wireless to regain the upper hand.

"For the time being, AT&T and Cingular will tread water for a year," said Roger Entner, a Yankee Group telecom analyst. "Verizon will plow along and catch up with them in a year or year and a half. Even at its current growth rates, Verizon would surpass the combined new entity in less than three years."

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