Another year, another big merger

Second in a two-part series reflecting on the AT&T-SBC and Verizon-MCI mergers a year later. (Read Part 1 here.)

It really shouldn’t be a big surprise to discover that the merger of AT&T and SBC is going better than planned.

Dating back to its purchase of Metromedia’s cellular business in 1987, SBC--then known as Southwestern Bell--has been buying its way into bigness, steadily acquiring other companies--Pacific Telesis (1996), SNET (1998), Ameritech (1998), Comcast Cellular (1999)--leading up to its merger with AT&T, which closed in late 2005.

And, as Chairman and CEO Edward Whitacre and Senior Executive Vice President and CFO Rick Lindner shared with the financial world Thursday, AT&T is substantially ahead of schedule both in revamping its organization by trimming jobs and in recognizing the synergy savings promised in the merger. In fact, on the latter score, the company is well ahead of the game, posting savings of $1.1 billion, or $300 million more than originally projected.

“In 2007-2008, our merger synergy savings will run at the high end of our original target ranges,” Lindner said. “We expect expenses to be $200 million, below the $400 million to $600 million range in original plan.” AT&T originally projected synergy savings of $2 billion to $2.4 billion for 2007 and $2.7 billion to $3 billion in 2008.

“Our guiding principle has been fundamentally the same, and we are approaching the BellSouth merger in the same way,” said Ken Raley, vice president of network planning at AT&T. “It is a merger of assets that complemented each other. We know how to take the debate out of it. Teams get focused on how to do things, not what to do. In no way are we being paralyzed by the merger process.”

“We have people who have been through this a number of times,” said Mark Fischler, vice president of Migration Strategy and Planning at AT&T, and a veteran of the merger process since he came on board from PacTel. “We’ve learned from past mistakes.”

In the case of both the AT&T-SBC merger and now the AT&T-BellSouth merger, the companies were allowed to do some pre-merger planning under the careful supervision of lawyers who were always present, Fischler said.

“From day one, we knew what the network product portfolio was going to be,” he said. “We have a command center with SMEs (subject matter experts) ready to knock down issues as they came up, one by one, but there aren’t a whole lot of phone calls coming in. Our experience in doing this is allowing us to get out of the chute quickly.”

One of the obvious synergies is moving the long-distance traffic of the local operating companies onto AT&T’s national backbone network. As part of the merger process, AT&T has accelerated the deployment of its ultra-long haul network, boasting OC-768 speeds of 40 Gb/s, or four times the current long-haul network capacity.

“AT&T announced its plans to build out an ultra long-haul network about a year ago, but we had it staged out over a period of years,” Raley said. Instead, the company more quickly extended the reach of that network through first the 13 SBC states and now the nine served by BellSouth.

“There were two issues,” Raley said. “First, there were purely economic dictates, but the other one was that, as we do this, we have greater reliability and manageability of the network. By moving faster to close the rings and loops of the network, we could make it more resilient. That’s at Layer 1, the fiber transport layer.”

At Layer 2, AT&T is able to also move more quickly to pull its Cingular wireless subsidiary’s traffic off leased lines and onto its IP backbone. Layered on top of the ultra long-haul network are a group of next-generation secure backbone hubs known internally as SNRCs, which house the OC-768 routers.

Through this process, the company is more quickly merging its networks onto a truly integrated IP infrastructure, which promises greater efficiencies, cost savings and a greater ability to serve customers, Raley said.

Globally, the AT&T network carries 8.52 petabytes of data traffic on an average business day, offering MPLS-based service to 137 countries via more than 1600 service nodes. The company has 32 Internet data centers on four continents and 536,000 route miles of fiber optics.

In its U.S. carrier scorecard, the Yankee Group rated AT&T first among carriers, with high marks for business and services infrastructure, service level agreement (SLA) strategies, network reach and service mix.

“AT&T ranks the highest in our overall scorecard because it has put the capabilities together to deliver high-end professional and communications services to large multinational companies,” the scorecard report said. “The SBC part of the company has learned from its long history of acquisitions how to merge and integrate disparate systems and cultures, and continues to do that with USinternetworking and the … BellSouth acquisition. With the BellSouth acquisition, AT&T will also gain complete control of Cingular, which makes it the only player, besides Sprint, in this competition to have the potential to fully integrate wireline and wireless services on its own infrastructure.”

The merger and integration of disparate systems involves a process of looking at what’s currently deployed and what is best-in-class, in each area of the network and in each system, Raley said, “whether it was internally or externally developed,” then setting that as the standard that will be deployed throughout the company.

Because both SBC and AT&T were in the process of migrating legacy data services onto an IP backbone, it is easier to develop common practices and standards for that converged network, and the company is working with its customers to migrate them as well – but at their pace.

“It all starts with the customer,” Fischler said. “We will honor all contractual obligations until the contract expires. Contract expiration/renegotiation is a general trigger for us and for our customers to migrate to new services which are more cost effective.”

If customers are ready to move off frame relay, AT&T will let them out of an existing contract, provided they move to a Layer 2 service with AT&T.

“We are seeing a lot of customers do that,” Fischler said.

AT&T has done a good job of protecting its customers from any merger chaos, said Jeffrey Kaplan, managing director of THINKstrategies, an industry consultancy focused on managed services for businesses.

“They haven’t been as good about promoting their integration efforts as Verizon has been,” he said. “But they have done a good job of staying focused on customers throughout the merger.”

Wireless-wireline integration, and IP multimedia subsystem (IMS) deployment are definitely on the AT&T roadmap, Raley said, and while both AT&T and BellSouth were working with Lucent Technologies on IMS, the two wireline companies and Cingular each had a slightly different approach.

“In terms of the foundational platform, we have three different views and priorities around IMS,” he said. “What we will attempt to do is integrate, to a single core network, even if we still have multiple [piece part] vendors. That will bring challenges around interoperability, but we face those anyway. The more important thing is to have a common core.”

One positive impact of the merger on the IMS transition is that the three companies will be working together from the outset, rather than trying to make their approaches to IMS work together after the fact. “That doesn’t mean we’ll be faster in getting to IMS, but it means we’ll do a better job of it,” Raley said.

AT&T expects to offer IMS-enabled voice over IP this year, Raley said.

“It all starts with the customer,” Fischler said.

Integration of SBC customers’ services isn’t scheduled for completion until the end of 2008, with some services such as out-of-region local voice and data center hosting to be completed by the end of this year.