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Merger Mill Grinds to Halt in Telecom

Yes, tech pairings have restarted this week, but telcos seem to be stuck on the sidelines.

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


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to acquire



came in the wake of Wednesday's news that PeopleSoft had bid on business software rival

J.D. Edwards



That same day,



agreed to merge with handheld computer rival




But despite an abundance of preliminary chats between phone giants like





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, as well as conversations among wireless dealmakers involving

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AT&T Wireless


, 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


(VZ) - Get Report




are duplicating service packages offered by long distance rivals AT&T and


, 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.

Bad Feelings

This may seem slightly odd for a sector that brought some of the largest deals to the market in the late '90s. But obviously, things have changed a bit since then.

Origins of the industry's merger shyness can be traced in part to the 2000 kibosh the Justice Department put on the proposed merger of


with a company that was then known as WorldCom and now goes by MCI. The U.S. government said combining Sprint and WorldCom would put too much of the market in too few hands. Since then, fear of antitrust scrutiny -- in addition to the industry's problems with debt and basic-business erosion -- has helped keep the blockbuster deals in check.

Probably the biggest and most widely known deal discussions concern the possible hookup between local phone giant BellSouth and top long-distance player AT&T. While some observers had debated the merits of combining BellSouth's stalled local phone business with AT&T's deteriorating long-distance effort, others say the deal's threat to recombine Ma Bell with a Baby Bell is almost a nonstarter. To foster competition, AT&T was broken up into a long-distance business and seven Baby Bells in 1984. Efforts to rejoin the family have never proceeded beyond the discussion stage.

"I wouldn't be surprised if there were conversations, but a deal with AT&T and BellSouth would be exceptionally difficult from a regulatory perspective," says Klugman.

"These are untested waters," says a former Justice Department antitrust lawyer. "We really don't know how things will play out among the regulators, the Department of Justice, and any other group that looks at these deals."