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Biggest Northwest buyout to alter wireless landscape

By Tricia Duryee
Seattle Times Eastside business reporter

	JOHN LOK / THE SEATTLE TIMES Cingular's acquisition adds uncertainty for workers at AT&T Wireless' headquarters in Redmond.
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Atlanta-based Cingular and the Redmond wireless carrier declined to specify what the combined entity will look like, but they hinted at its potential.

"That's a terrific day when customers are going to end up with better service and quality, employees will have a more robust career opportunity, and we'll have the scale to do a lot more," said John Zeglis, chairman and chief executive officer of AT&T Wireless. "All of that convinces us that we are absolutely doing the right thing."

When the two companies combine in the largest acquisition in Northwest history, they will have 46 million subscribers, surpassing Verizon Wireless as the largest national carrier. They will have one of the largest networks, allowing them to roll out the next generation of wireless technology, which involves high-speed data.

The merger will also narrow the field of major U.S. carriers from six to five, which means fewer competitors but also less money to be spent on things like cell towers and advertising.

For customers, the Cingular brand will replace AT&T Wireless, and the two companies will have to work on compatibility issues.

Locally, the deal will be a blow to a region that saw another major, homegrown wireless carrier — VoiceStream Wireless, now T-Mobile USA — gobbled up by an out-of-town company, taking away some of the Northwest's luster as a hotbed of wireless innovation.

AT&T Wireless' 31,000 employees — 5,700 in Washington — face an uncertain future. It's likely the companies will trim the work force, though the scope of that has not been determined.

Zeglis said AT&T Wireless will run independently until regulators and the company's shareholders sign off on the merger, expected by year's end.

"We are still pedal to the metal and will work on making numbers and improving the quality of the network to be rewarded," he said.

The deal capped weeks of speculation after AT&T Wireless, which began as McCaw Cellular Communications, put itself up for sale in late January. Disappointing financial results in the fourth quarter and operational problems increased pressure to make the company an acquisition candidate.
 
Record acquisition

AT&T Wireless accepted the bid from Cingular, jointly owned by SBC Communications and BellSouth, early yesterday. Under terms approved by the boards of directors of both companies, AT&T Wireless shareholders will receive $15 a share — the $41 billion in cash. If AT&T Wireless' debt and cash are figured in, which Wall Street commonly does to value a deal, the price increases to $47 billion.

Either way, it easily becomes the largest acquisition in the Northwest, trumping Deutsche Telekom's $29 billion purchase of VoiceStream (T-Mobile USA) and Boeing's $16 billion acquisition of McDonnell Douglas.

The winning bid came in a brutal auction process that built up over Presidents Day weekend, pitting Cingular against Vodafone Group, the world's largest wireless company.

The bids had escalated from Cingular's offer more than a month ago of $11 a share, or $30 billion, with Newbury, U.K.-based Vodafone reportedly matching each Cingular offer.

The race was so close that many stories yesterday implied that Vodafone had the edge.

Quoting former New York Yankee Yogi Berra, Zeglis said in a conference call yesterday: "It ain't over till it's over."

He said the board met in New York most of Monday and into yesterday.

"We had just finished our third pizza when they brought over the last papers," Zeglis said, adding that a digital photograph was taken of him by camera cellphone as he signed papers at 1:30 or 2 a.m.

During the conference call, an analyst asked him to specify: AT&T Wireless or Cingular phone?

Zeglis laughed, an indication of the day's celebratory tone.

Uncertainty for workers

The mood may not have been so celebratory at the company's Redmond headquarters or its data center in Bothell.

AT&T Wireless is likely to see some job reductions, though neither company is saying how significant layoffs will be. But Wall Street already is pressuring Cingular to justify the $41 billion purchase price and realize the $1 billion in savings it predicts for 2005.

"First of all, I think there's a great deal of talent in both of these companies," said Ralph de la Vega, Cingular's chief operating officer. "Our commitment will be to review the talent and put the best talent forward to work for us. The Redmond area is well known as a great source of innovation and creativity and entrepreneurs, something needed in the wireless company we are putting together."

Zeglis said the cuts will start at the top. He will leave the company once the deal goes through. "There will be some job compression," he said. "There are two pools of deep talent."

Cingular CEO Stan Sigman said during the conference call yesterday that the deal doesn't mean the Redmond headquarters or other offices will be eliminated.

"We aren't into that level of planning, but ... I'm not of the belief that everyone has to be in the same location," he said. "It's certainly possible employees will (stay where they are)."

For workers at AT&T Wireless, however, the uncertainties add to stress they say has enveloped the company in recent months. One example is an announcement this week that 250 information-technology workers would be laid off by the end of March.

Employees in Redmond and Bothell learned about the sale through a companywide voice-mail message from Zeglis.

One manager, who works in Bothell, said it's too early to know how many employees will be laid off. The manager, who asked not to be identified, said he worked for Cingular but was recruited by AT&T Wireless three months ago.

"Is it going to have some kind of impact? Sure," he said. "Give me a merger that hasn't had an impact."

Like many other telecommunications workers, he has seen the effects a merger can have. "There's gonna be pain," he said. "Some people aren't going to deal with it well. Some people will be better off."

Next steps

While details of combining the two companies are worked out, the deal faces some hurdles.

It needs AT&T Wireless shareholder approval, and the U.S. Department of Justice and the Federal Communications Commission are expected to weigh in.

Regulators could insist the two carriers divest some of their assets in order to complete the deal, said Randal Picker, a University of Chicago Law School professor.

"This is a merger of the second- and third-largest firms in the industry by subscribers," Picker said. "In that sense, it's substantial."

But Charles Hill, a business-school professor at the University of Washington, said there will still be five U.S. carriers, suggesting the deal could easily get approved.

"The competition is still intense," he said. "The (Department of Justice) will still look at it, and give it a nod, but not require much change or shedding of assets."

That competition, in fact, is primarily why the acquisition is happening. Intense price competition has dampened carriers' revenue potential, while the pressure is on to hold the line on costs.

In the fourth quarter, AT&T Wireless had a net loss of $84 million, or 3 cents a share, on sales of $4.2 billion. Analysts had expected the company to break even.

Market-leading Verizon Wireless is the only carrier to come close to gaining market share, said Standard & Poor's Kenneth Leon, an equity analyst who does not own AT&T Wireless stock.

"They are dominating the industry, and for competitors to catch up, they have to consider an acquisition," he said.

Combining its operations with AT&T Wireless, Cingular would have annual revenue of $32 billion. It also expects to achieve savings in distribution, billing, marketing, advertising and other functions.

Also part of the acquisition's attractiveness are AT&T Wireless' assets. Among all of the carriers, it has one of the most advanced digital networks, allowing high data-transfer speeds.

AT&T Wireless also has a significant amount of spectrum, the licensed airwaves that carry cellphone signals, while Cingular has been hungry for more.

"We will now have the spectrum to launch (new services); we did not have the nationwide footprint before," said Cingular's de la Vega.

Or, as Zeglis optimistically put it in the conference call: "This new company is going to see a lot of others in its rearview mirror. To put it another way, 'Hey Verizon, can you hear us now?' "

Seattle Times business reporter Shirleen Holt contributed to this report. Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com

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