AT&T bulks up with BellSouth buyout

Federal customers should see more services and capabilities but less competition

By the numbers

AT&T Inc.

Headquarters: San Antonio

Chairman and CEO: Edward Whitacre Jr.

Employees: 189,000

2005 revenue: $43.9 billion

2005 net income: $4.8 billion


BellSouth Corp.

Headquarters: Atlanta

Chairman, president and CEO: F. Duane Ackerman

Employees: 63,000

2005 revenue: $20.5 billion

2005 net income: $3.3 billion

Source: Nasdaq

Michael Bechetti

AT&T Inc.'s proposed $67 billion stock purchase of BellSouth Corp., the largest deal yet in the ever-consolidating telecommunications industry, could help federal government customers, but likely won't increase competition, federal telecom market analysts said.

"There's a lot of potential in terms of this deal for federal users," said Warren Suss, president of Suss Consulting Inc. "Whether or not the corporation is able to achieve that potential is going to depend on a lot of things."

Because AT&T offers a wider range of telephony services than BellSouth, it can offer BellSouth's customers new, comprehensive, better-integrated, end-to-end solutions, Suss said.

After the deal is approved, AT&T will have to focus on integrating its network with those of BellSouth and SBC Corp., Suss said. SBC completed its $16 billion purchase of AT&T Corp. in November, but kept the AT&T name and brand.

Southern exposure

If regulatory authorities approve the deal, AT&T will add to its geographic reach. BellSouth's nine-state territory in the southeastern United States includes Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. BellSouth's relatively small federal market centers on services to military bases and civilian agencies in that region.

In the mid- to long-term, the merger could improve AT&T's network management capabilities, such as quicker problem resolution, Suss said.

If AT&T and BellSouth integrate well their network management systems and customer service and support centers, the merged entity will be readily able to identify service disruptions and easily resolve them, he said.

"It's always been a headache for customers to resolve problems when each of their vendors only has a window into their portion of the network," Suss said.

Whether the deal would also yield lower prices for government clients is yet to be seen, some analysts said.

"Competition is one of the main factors driving price," so mergers don't always give an incentive to drop prices, said Sandra Bates, a consultant at Topside Consulting LLC, and a former commissioner of the Federal Technology Service at the General Services Administration.

BellSouth spokesman Todd Smith referred all questions about the deal's impact on the government market to AT&T.

BellSouth was set up in 1984 after AT&T's was divided into seven regional Bell operating companies. Based in Atlanta, it is the incumbent local carrier providing a wide range of communications services in its local service territory. BellSouth offers consumer and small-business service bundles as well as voice, data and Internet services for businesses and managed services.

Based in Vienna, Va., AT&T Government Solutions furnishes telecom and IT services for the federal government. Its Houston-based parent company, AT&T Inc., is No. 31 on Washington Technology's 2005 Top 100 list. BellSouth is not on the list.

Growth by buying

Through a chain of acquisitions over the last 10 years, SBC has built itself into a national provider. The company bought Pacific Telesis Group in 1997, Southern New England Telecommunications in 1998 and Ameritech in 1999. These acquisitions added a larger range of integrated solutions for government customers, said Ray Bjorklund, senior vice president and chief knowledge officer at Federal Sources Inc.

For example, if the military would need bandwidth of terabits per second to move large amounts of data quickly from the Army Space and Missile Defense Command in Huntsville, Ala., which is in BellSouth territory, to a test center in Texas, it could do it more efficiently and perhaps more economically with the larger range of integrated services that AT&T will provide when the companies complete their merger, he said.

"When you need that much bandwidth, you don't want interruptions in the data that might arise from intermittent connectivity, or even from inefficient network routing of the signal," he said.

AT&T's acquisition of BellSouth will bring "more innovation, agility and full integration of wireless and wireline IP networks" to the government market, said Don Herring, president and general manager of AT&T Government Solutions.

In the meantime, AT&T will stay focused on delivering network-enabled solutions and accelerating the convergence of new and improved services in the wireless, broadband, video, voice and data markets, he said.

The BellSouth buy also will give AT&T full control of Cingular Wireless LLC, the country's largest mobile phone provider with approximately 52.3 million subscribers. AT&T holds a 60 percent stake in Cingular, BellSouth owns the remaining 40 percent.

"It's clear that the federal wireless arena has substantial untapped potential, and this potential could be accelerated by providing greater reliability and security to federal users," Suss said.

In the future, AT&T will pursue most major federal network projects and may bid on contracts with network components, such as GSA's $50 billion Alliant contract for governmentwide IT services, Suss said.

Earlier this year, AT&T Government Solutions said it won a three-year, $95.4 million contract to furnish circuits and manage network bandwidth for the Defense Information Systems Network, which supplies Defense Department users with information services, including voice telephony, messaging, data networking and video. It also won a subcontract worth as much as $51 million to build a modern IP system for voice and videoconferencing for the Defense Information Systems Agency.

The Army awarded the company $15 million in follow-on work on two contracts to develop its next generation of live battlefield training systems.

No surprises

Most telecom competitors were not caught off guard by AT&T's announcement of the deal, especially as they try to ward off cable companies encroaching on their services delivery.

"We view this combination as logical and predictable, in line with the telecom industry's consolidation of assets and capabilities as competition against cable increases," said Jerry Edgerton, group president for federal and systems integrators at Verizon Inc.'s government business division. Verizon Communications Inc. bought MCI Inc. for $8.5 billion late last year.

The merger is unlikely to have an impact on Verizon's government business, Edgerton said. Verizon has a strong track record in offering data, Internet and voice communications to government customers, he said.

Other companies are publicly keeping mum on the new proposed deal.

Qwest Communications International Inc. spokeswoman Claire Mylott declined to comment on the proposed deal's impact on the federal government market. Although Qwest is one of the smaller players in the highly competitive federal market, a Qwest-led team has bid on GSA's $20 billion Networx telecom services contract.

The governmentwide contract has two parts: Universal and Enterprise. The Universal part will give government locations with a broad range of telecom services nationwide, and the Enterprise part will offer a range of specialized IP or wireless services in specific geographical areas. Multiple awards for the two parts of the procurement are slated to be issued March and May 2007, respectively.

Judging by the brisk activity, it appears that industry consolidations may well continue, especially amid speculation that Verizon may buy Qwest, Suss said. But with consolidation engulfing almost all the major carriers ? and in an effort to fend off cable companies ? they likely will turn their acquisition attention to other types of technology companies.

"There certainly is also the potential for carriers to move into some of the professional services associated with technology," Suss said. For example, a telecom company could buy Computer Sciences Corp., which is rumored to be on the block, he said.

"There are other companies that could be picked up to provide a more complete set of professional and network services," he said, "so there's still room for more consolidation there."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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