Bell Merger Still an Unsure Bet

P> Bell Atlantic's Michel Daley sits in a room full of telephones, answering calls from reporters, analysts and shareholders. He's fielding questions about one of the biggest proposed mergers: the marriage of Baby Bells NYNEX and Bell Atlantic. "We're in a war room," he sighed.

The merger, which will take at least 12 months, will result in a new Bell Atlantic, with headquarters in New York and a whopping market value of $50 billion. It would be the nation's second largest telecommunications company, behind AT&ampT, Basking Ridge, N.J. The new Bell Atlantic will employ 133,000 after a 3,000-person layoff, generate 1995 revenues of $27.8 billion and provide service to 26 million customers in 13 states.

All mergers must go through the perfunctory regulatory hoops, and the parties involved usually have to defend themselves against critics. But with so much at stake in this alliance, the challenges to Bell Atlantic's proposal is expected to be particularly drawn-out, bloody and controversial. The Telecommunications Act of 1996, passed in February, set the stage by opening up competition among local and long distance carriers. Teamed with new technologies such as the Internet and personal communications services, the telecom market is extremely volatile.

Even if the merger goes smoothly, "the first year of the new company will clearly have some bumps," said Jack Grubman, managing director with Salomon Brothers' New York office. Management will promote each others' best practices and try to reach double-digit earnings growth while competitors wait to take advantage of any stumble. If all goes well, annual earnings will reach 10 percent to 12 percent for the new company, versus 7 percent to 10 percent for the two companies individually. However, that earnings growth probably will not happen until the third year following the merger.

The board of directors for both companies approved the deal, and shareholders expect to meet in the next month to finalize the proposal.

The government also will play a huge role in the merger. The Department of Justice and the Federal Trade Commission must approve the plan, making sure it does not violate antitrust laws. If the Justice Department finds a problem, it will ask the telco to fix it, or it will sue. Few companies want to go to court with the Justice Department, so a consent decree usually follows.

The Federal Communications Commission must ensure that the merger is in the public's best interest, and approve a transfer of radio spectrum. All 13 states served by Bell Atlantic and NYNEX also must approve the alliance. Although the merger does not require the blessing of the Securities and Exchange Commission, the agency does have to approve all proxy statements and financial documents filed for the merger and approve the new accounting rules under which the merger takes place.

In addition, Bell Atlantic must file for regulatory approval in New Zealand, where it runs a division called Telecom Corp. of New Zealand, and NYNEX must ask permission from the United Kingdom, where its NYNEX CableComms subsidiary is based.

But international, federal and state governments aren't the only ones who care about a deal like this. Bell Atlantic/NYNEX competitors likely will protest approval of the merger because it would be bad for consumers.

"There will be powerful groups against us," said Daley. "It will create some hurdles." The two Bells, however, are prepared. "It's par for the course for such a large merger," Daley added.

Within hours after the merger announcement, several groups publicly voiced their criticisms: The Communications Workers of America said it opposes the alliance, AT&ampT claimed the merger would create a new monopoly, and consumer groups said customers would lose because of a lack of price competition. "As the public policy process moves forward, those groups will weigh in," said Tom Tauke, executive vice president for government affairs at NYNEX.

The proposed merger between Bell Atlantic and NYNEX is "particularly troublesome" because of the geographic proximity of the two companies, said Jamie Love of the Consumer Project on Technology, a Washington-based consumer advocacy group.

Both companies have well-known brand names that would make it easy for them to compete in each other's markets. By merging, they avoid competition, Love alleged.

The project plans to oppose the merger because of the "potential for mischief in the way long distance and interstate service is provided," Love said. Companies must pay for network access. A rigid structure wouldn't hurt Bell Atlantic because it would be an internal paperwork transfer between business units. But it would limit the flexibility of smaller competitors to offer premium services.

"We're interested in making it a test case, [dealing with] how big is good," Love said. The Justice Department does not oppose mergers just because they create large companies, but it must acknowledge that large companies have the clout to shape the rules that regulate them, he said.

For example, in proceedings on integrated services digital network pricing, the project found that the regional Bell operating companies used their clout to prevent others from making comments critical of the Bell operating companies. Smaller companies that buy services from the Bell operating companies, or that bundle services and products with them, can fall victim to the influence of the Bells.

AT&ampT raised many of the same objections on the deal. Bell Atlantic and NYNEX, as separate companies, would have competed against each other, pointed out AT&ampT spokesman Jim McGann. That's different from the other Bell merger, proposed earlier this month, of SBC Communications Group and Pacific Telesis Group. "Bell Atlantic's and NYNEX's providers' areas abut one another. Where is the benefit to consumers?" asked McGann. The proposed merger, he said, goes against the idea of new competition promised by the Telecommunications Act of 1996.

"AT&ampT and MCI will never support this merger because they recognize that the new company will be a stronger competitor," said NYNEX's Tauke. As for the Communications Workers of America, Tauke said no union members will be laid off from either company.

Nevertheless, the battle has just begun.