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Updated from 7:28 a.m. EST

SBC Comunications


said it would pay a 40% premium, or $3.9 billion, for

Sterling Commerce

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, in a move designed to give SBC more exposure to the business-to-business e-commerce market.

The all-cash offer of $44.25 for the outstanding shares of the Dallas-based developer of e-business software is expected to be completed by late March or during the second quarter, according to a statement from the company.

Steve Olson, an analyst at

Pacific Growth Equities

, said SBC's offer was fair, but not in the class of premiums being paid for business-to-business companies.

"That's a very conservative valuation for B2B. But some of these valuations, some of these are getting tough to sustain. The other side is that they got about five and a half times current revenues."

SBC's stock was down 2 1/2, or 6%, at 35 3/4, while Sterling was up 11 15/16, or 38%, to 43 1/2 in afternoon trading. SBC closed down 1 3/4, or 5%, at 36 1/2, while Sterling Commerce finished up 11 7/16, or 36%, to 43.

Olson said he is watching for merger activity among Sterling peers like


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GE Information Systems

, a unit of


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. Harbinger fell 1%, or 7/16, to 27 3/16 in afternoon trading.

Bob Wilkes, an analyst at

Brown Brothers Harriman

who follows but does not rate the company, noted a number of obstacles ahead for SBC in the near term.

"They're struggling with competition and


regulations, they have the burden of Project Pronto, a $6 billion capital project, and earnings are going to be accelerating in 2001 but investors are looking at 2000. They're talking about mid single-digit growth for 2000."

Wilkes said the broader industry is expecting double-digit growth, which makes SBC a "negative deviant" from the pack.

"This is an outstanding addition to our already strong line-up of data services, enhancing our ability to offer our business customers integrated, end-to-end e-business solutions worldwide,'' said Edward Whitacre Jr., chairman and chief executive officer of SBC.

"This gives SBC a leg up against its customers, by having Sterling in-house. They get SBC, an in-house solution for e-commerce for their corporate customers," said Olson, who rates Sterling a long-term buy. He does not cover SBC and his firm has done no recent underwriting for either company. "They'll provide a data center that manages the data flow between trading orders."

SBC, based in San Antonio, is a broadband telecommunications provider of wireless and regular wire-based phone service across the U.S and abroad. SBC's subsidiaries are

Southwestern Bell Telephone

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Pacific Bell


Warner Blow, chief executive officer of Sterling Commerce, said SBC's distribution channels and relationships with emerging small- and medium-sized businesses will strengthen Sterling. The alignment with SBC, he said, will allow Sterling to focus on "aggressive development of advanced e-business software and services."

SBC also said it would use Sterling's services to further streamline its internal business processes and generate cost efficiencies.

"This instantly gives SBC the skill sets, software, products and services needed to take the lead in one of the most rapidly growing segments of the e-commerce market," Whitacre added.

"We will not be shy in expanding the network and making the necessary capital expenditures ... to meet exploding demand we are currently experiencing," said Donahue in a conference call with analysts and investors.