Merger Mill Grinds to Halt in Telecom

A hardware merger here, a software merger there. Next thing you know, Wall Street is suddenly watching the wires for word of the next big tech acquisition.

But don't expect to see much in the way of smoke signals from the telecom tent. It's been a good two years since deal talk led to action in these parts, and industry observers see roadblocks even if big telcos do want to pair up.

Though it hardly qualifies as merger mania, this week's action in the tech sector has yanked the M&A machine out of mothballs. Friday's $5.1 billion hostile bid by Oracle (ORCL) to acquire PeopleSoft (PSFT) came in the wake of Wednesday's news that PeopleSoft had bid on business software rival J.D. Edwards (JDEC).

That same day, Handspring (HAND) agreed to merge with handheld computer rival Palm (PALM).

But despite an abundance of preliminary chats between phone giants like BellSouth (BLS) and AT&T (T), as well as conversations among wireless dealmakers involving Cingular, T-Mobile and AT&T Wireless (AWE), the telecom industry's merger-and-acquisition docket has been empty. This despite a long list of reasons that merger proponents can list off.

Taking the Case

With six wireless service companies vying for business in most major cities, a critical cap lifted on the amount of wireless radio wave spectrum any single player can own, and the abrupt slowdown in new subscriber growth, the case for consolidation appears strong. The last two months' sharp rise in stock prices has only emboldened the speculators.

Similarly, now that local phone companies like Verizon (VZ) and SBC (SBC) are duplicating service packages offered by long distance rivals AT&T and MCI, there's reason to think the seven big phone players could find their way to a field of three.

"Everyone wants someone else to merge," says Jefferies & Co. analyst Richard Klugman. Sales are down, competition is brutal, a merger "would reduce one less price leader. They just aren't sure the benefits are there," says Klugman, referring to the merger stalemate.