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Can Cingular connect with AT&T Wireless?

As Valentine's Day approaches, even telecom operators show they aren't immune to a little romance.
/ Source: Forbes

As Valentine's Day approaches, even telecom operators show they aren't immune to a little romance.

Rumors about who is wooing whom in the industry have been swirling since late last year, but speculation became reality Jan. 20 when second-ranked U.S. operator Cingular Wireless reportedly made a $30 billion all-cash proposal to free-spirited single AT&T Wireless.

So, would this be a marriage from hell or a perfect match?

For AT&T Wireless, the answer is neither. Not a case of love at first sight, the proposed merger sounds more like a blind date set up by a well-meaning friend: The two parties have things in common, but there's no guarantee of bliss.

AT&T Wireless and Cingular, which is a joint venture of SBC Communications and BellSouth, don't lack for similarities. Both have a large pool of subscribers, networks based on the same Global System for Mobile Communications technology, and a need for the truly U.S.-wide coverage they could achieve by joining forces.

But since the number portability rules came into effect in November 2003, the two operators have been losing customers to Verizon Wirelessthe Verizon Communications unit that is the largest wireless operator in the U.S. — and have so far been unable to reverse the trend.

To Phil Redman, research vice president of mobile wireless communications for Gartner, AT&T Wireless' and Cingular's similarities are the exact reason why the merger is unconvincing.

"A lot of the market could be redundant," he says, also noting that AT&T's well-known name, light debt, strong business clientele and reputation for innovation (it launched a wireless data technology called Edge in November), should make it a buyer rather than a seller.

Additionally, he warns of the integration hardships commonly associated with mergers. "Any benefits from the merger would take about 24 months to achieve. That's a significant amount of time for rivals to advance their position."

Still, while a merger would make the newly created company vulnerable for a few months, it may be the only way for the two operators to fight off Verizon Wireless. Cingular in particular has much to gain, says Ken Hyers, a senior analyst at telecom research firm In-Stat/MDR.

"For them [Cingular], the deal makes a lot of sense," he says, especially since a merger would allow the company to capture the business clientele it currently lacks.

As far as AT&T Wireless is concerned, a deal would let it come full circle after being spun off from AT&T in 2001 by regaining the kind of stability that association with a landline operator like SBC can provide, says David Chamberlain, the research director for wireless services and networks with Probe Research.

By joining forces, Cingular and AT&T Wireless could also pull together enough radio spectrum to roll out the latest third-generation technology across the United States. But for now, expanded coverage may well be the deal's strongest selling point, since it is the area where the two carriers have lost the most ground to Verizon.

"Both AT&T and Cingular are national carriers, but they don't have a national network," says In-Stat/MDR's Hyers. A merger would remedy that. And while there may be few economies of scale left to be made in the industry, the new company, which would have 45 million customers in comparison to Verizon's 36 million, should enjoy enough leeway to stop competing directly with the current No.1.

But even if Cingular's offering is all cash, the dowry is just $11 per share. AT&T Wireless closed Jan. 20 at $10.39, up 40 cents on the day. Three other carriers, Nextel, Britain's Vodafone and Japan's NTT DoCoMo, have recently shown interest in AT&T Wireless. NTT has reportedly made an offer, but the company won't comment on any potential bid they could have made.

Vodafone is the biggest of the three carriers, and it has made no secret of its desire to acquire a large presence in the U.S. market, but analysts say it would make no sense for the company to divest itself of its 45% stake in Verizon Wireless. With a 16% stake in AT&T Wireless, NTT DoCoMo seems like a well-positioned candidate, but, lately it has pulled out of its foreign ventures and a departure from that strategy seems unlikely, says Hyers. Finally it's hard to imagine any U.S. carriers matching Cingular's rumored cash offer.

If there is a sensible coupling in the wireless industry today, Cingular-AT&T Wireless is the one. Still, it would be nice if something a little more exciting than a pure marriage of reason between two operators losing ground would come along.