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AT&T will likely avoid megamerger curse

AT&T Inc. has a solid record as a takeover machine, and outside experts say a takeover of BellSouth Corp. is likely to be a smooth operation.
AT&T and BellSouth are already close partners in Cingular Wireless, so their management teams know how to work together.
AT&T and BellSouth are already close partners in Cingular Wireless, so their management teams know how to work together. Shiho Fukada / AP
/ Source: The Associated Press

If AT&T and BellSouth merge, it will be a gargantuan task, affecting tens of millions of customers and investors and more than 300,000 employees.

Many mergers of that scale have failed miserably, sunk by differing corporate cultures and mismatched businesses. But AT&T Inc., which recently changed its name from SBC, has a solid record as a takeover machine, and outside experts say a takeover of BellSouth Corp. is likely to be a smooth operation.

The possible pitfall to the $67 billion deal: the old SBC is still digesting its acquisition of the old AT&T, which closed in November. Even if the BellSouth acquisition doesn’t close for another year, the SBC-AT&T integration will still be going on.

“SBC is really good at doing mergers and deals,” said Chris Bogan, chief executive of consultancy Best Practices. “Here’s where the challenge lies for them: They’re trying to merge two companies at once, and each of them individually is bigger than they’ve had to deal with before.”

So far, the SBC-AT&T merger appears to be going well. At Gartner Inc., which is consulted by corporations choosing telecommunications carriers, analyst Ken McGee said AT&T and SBC customers had not reported any problems so far.

“If there was something wrong, we would have heard it,” McGee said.

Customers are perhaps the most important constituency to keep happy during a merger. In one of SBC’s rare setbacks, it was fined millions by state regulators because of poor service in the years after it took over Chicago-based regional Bell company Ameritech in 1999.

“When we bought Ameritech there were service problems right afterwards, but frankly, those were service problems that we had inherited, and we moved very quickly to take care of those service problems,” said James Callaway, who has led the SBC-AT&T merger integration team.

“We didn’t like that moment in time any more than the customer did,” Callaway said.

In a similar case, service quality at AT&T-BellSouth joint venture Cingular Wireless seems to have suffered after it acquired AT&T Wireless in October 2004.

AT&T Wireless had a history of service problems, and former AT&T customers who had not bought new Cingular phones last year were particularly unhappy, according to a Consumer Reports survey.

However, if AT&T merges with BellSouth, there shouldn’t be any additional cell-phone problems, since those operations were already merged with the creation of Cingular. Merging the landline operations also should be quite easy, experts say.

“I would challenge anyone to go into a central office (telephone switching station) in Atlanta and show me the material difference between it and a central office in Dallas, Texas. You’re just not going to know the difference,” McGee said.

This, of course, is because San Antonio-based AT&T and Atlanta-based BellSouth are both parts of the old monopoly Bell system. Though they’ve been separated since 1984, they largely use the same technology.

“You would find it hard to find two companies more closely aligned from a cultural perspective, a technology perspective and a heritage perspective,” McGee said.

Another factor in the favor of the merger: AT&T and BellSouth are already close partners in Cingular, so their management teams know how to work together. They also merged their online directories last year into another joint venture,

Though the companies have strong similarities, their management cultures are quite different. When the Telecommunications Act of 1996 deregulated the industry, BellSouth basically stayed put, while SBC, formerly Southwestern Bell, took a much more aggressive stance.

SBC became the first Bell to buy another Bell with its 1997 acquisition of Pacific Telesis. It then bought Southern New England Telecommunications of Connecticut in 1998 and Ameritech a year later.

With that experience behind it, merger planning is a meticulous process at the company. Before the merger with AT&T closed, Callaway assembled 14 teams at SBC, each with a counterpart team at the other company.

The pre-merger collaboration resulted in a playbook for each operational team leader. When the merger closed on Nov. 18, those books were opened.

The playbook for each division includes a target head count. AT&T has announced that it is looking to cut 10,000 jobs from the combined 320,000 it would have after the merger, but believes it can achieve that goal through normal employee turnover.

The job cuts will be key in satisfying investor expectations for the merger. AT&T has said the deal, expected to close next year after approval from regulators and shareholders, will save $2 billion a year to start, and $3 billion a year starting in 2010.

Apart from investors and customers, the success of the merger will be judged by another big audience: the people of the Southeast, and in particular those in Atlanta, BellSouth’s hometown.

“I think that will be the test in the Southeast for AT&T,” said James Senn, director of the Center for Global Business Leadership at Georgia State University in Atlanta. “Is it swooping in to make an acquisition, or is it making an acquisition to ... become an even better citizen of the community. That’s a leadership question and the tone will be set at the top.”

In a letter to his counterpart at BellSouth, AT&T Chief Executive Ed Whitacre promises to continue BellSouth’s “historic levels of charitable contributions and community activities” in its nine-state area.