SBC Communications Inc., the regional phone company with $40.8 billion in annual revenue, is in talks to acquire AT&T Corp., news outlets, including The New York Times and Wall Street Journal, reported Thursday, citing sources close to the negotiations.
A combination of AT&T and SBC would bring together aspects of two giants that were split up in 1984 as part of the divestiture of the Bell monopoly. A deal also would load San Antonio, Texas-based SBC with a portfolio of valuable corporate clients, which AT&T has been zeroing in on lately after deciding to abandon marketing traditional phone service to homes. SBC has emphasized a commitment to wooing more large businesses and reported yesterday that revenue from enterprise sales was up roughly 5 percent over the year-ago quarter.
AT&T and SBC both declined to comment on the reports.
“As a matter of policy, AT&T declines to comment on rumor or speculation about mergers, acquisitions, divestitures or other business combinations,” an AT&T spokesman said.
Sales at AT&T have been declining steadily for years in the face of heavy competition in its bread-and-butter residential long-distance business. For the 2004 year, AT&T’s revenue fell 11.6 percent to $30.4 billion. Sales included $22.6 billion from AT&T Business and $7.9 billion from AT&T Consumer.
Regional phone companies like SBC and Verizon Communications Inc. have snatched millions of long-distance customers from AT&T and the other two once-indomitable long-distance giants: MCI Inc. and Sprint Corp. SBC, the second largest local phone company, ended the year with 20.9 million long-distance lines and also reported declines in the number of consumer line losses to rivals.
AT&T and SBC have been on separate tracks, with AT&T shrinking and SBC expanding through its majority stake in the biggest wireless provider – Cingular Wireless – and a multibillion-dollar initiative to deliver video services to millions of consumers in direct competition with Comcast Corp. and other cable TV operators.
During an earnings call Wednesday, an SBC executive said the company planned to begin activating commercial video service on its network in the fourth quarter of 2005. Meantime, SBC has been selling satellite TV service through a partnership with EchoStar Communications Corp., ending the year with 323,000 subscribers.
Until recently, AT&T and SBC had been fierce competitors in the local residential phone market.
It was supposed to be that way.
Under law signed by President Clinton in 1996, SBC and the other regional phone companies were allowed to break into the long-distance business in exchange for opening their local residential phone networks to competition.
Consequently, AT&T, MCI and scores of other companies across the United States were allowed to begin offering local phone service over the regional networks under federal rules.
In July 1999, Texas – SBC’s home – was the first state where AT&T entered the local market via a regional phone network. AT&T made its debut in New York later that year, marking the beginning of an aggressive campaign to invade the turf of the regional phone companies.
As AT&T and MCI expanded their local phone operations in the next few years, Wall Street was becoming increasingly alarmed over the local line losses at SBC and the other regional phone operators. At the same time, SBC was gaining ground in the long-distance business. By October 2003, SBC had secured regulatory approval to offer long-distance service in all 13 states within its local phone territory.
The local-phone leasing regulations, however, sparked a long-standing feud that extended from state regulatory agencies and legislatures to Capitol Hill and the White House.
SBC and its peers argued before regulators and lawmakers they were being forced to subsidize competitors by leasing their local networks to rivals like AT&T at artificially low rates. Led by AT&T, competitors argued they needed to build an adequate customer base over the regional networks before they could justify investing in costly local infrastructure, including switching gear.
Outside of the regulatory wars, the sudden predominance of unlimited calling plans further intensified the marketing battle between the traditional long-distance carriers and regional phone companies, and further drove down rates for voice service.
At the end of 2003, AT&T had made local phone service available to 61 million households and reported about 3.9 million local phone customers, an increase of 63 percent from the prior year.
But the Bedminster, N.J., company announced plans last July to stop competing for traditional residential phone customers, marking a historic shift in the strategy of a company whose roots can be traced back to the invention of the telephone.
AT&T attributed the decision to regulatory changes after a federal appeals court threw out the local-phone competition rules. In December, five months following AT&T’s decision, federal regulators voted to phase out the contested regulations over a year.
The regional phone companies are starting to benefit from the decision as AT&T and others retreat from the consumer market. Still, SBC is facing pressure from other rivals, including cable companies expanding into the Internet phone business and wireless operators.
SBC lost 192,000 consumer lines in the fourth quarter but that is a substantial improvement over a year ago. The company lost 424,000 lines in the fourth quarter of 2003.
That was back when AT&T was still competing fiercely with SBC – and the same year another regional phone company was reportedly in talks to acquire AT&T: BellSouth Corp.
