Concert could get a wireless beat

BT, AT&T consider merging different business segments

BT and AT&T are at it again. The former officially confirmed that the companies are considering a merger, which could create a $185 billion company. While they may start with wireless and move to combine other areas of their businesses, together the carriers could create one of the largest fixed-line and mobile operators in the world.

But will regulators smile upon this union?

It certainly seems to make business sense. BT and AT&T have grown closer following the development of Concert, their joint venture to deliver telephony and data services to multinational businesses. And, because both companies are suffering in the stock market and feeling competitive pressures in their core markets, merging now might help their stance in the industry later.

"It makes sense. It wouldn't if they didn't start with wireless," said Rob Norcross, vice president of Mercer Management Consulting. "They need to start there because they need to counter Verizon."

Neither carrier would comment about the discussions, but BT's Web site confirmed that the British telco is talking about wireless opportunities with AT&T.

"These discussions include exploring ways of broadening and strengthening the scope of the relationship between BT and AT&T in business services," the statement read. "These conversations are continuing and may or may not lead to any change in the existing alliance arrangements."

The operators already are aligned in Concert and the Advance wireless alliance, but a stronger bond could give both more of a competitive edge.

"This is about two old-line telecommunications companies that are trying to move into a high-tech, multiplatform world," said Rudy Baca, global strategist with The Precursor Group. "Each needs a way to unlock the value of certain assets."

AT&T reportedly discussed combining some of its businesses with BT last week, while further considering a possible merger between AT&T Wireless and Nextel Communications. Besides talk of wireless, the companies also are considering a combination between AT&T's business services division and BT's business consumer unit. Analysts think this could be more of a challenge.

"Starting with wireless will be an easier way to join the companies because this [would require] an organizational change," Norcross said. "To integrate high-capacity networks is more difficult."

The carriers seem most concerned about gaining more of a global presence, which would help them target large corporations around the world, Norcross said. Therefore, a total merger might be imminent.

"They can get better economies of scale together when the [third generation of wireless] approaches." said Larry Swasey, vice president of communications research for Allied Business Intelligence.

Ultimately, a merger would place the carriers in a competitive position when they begin rolling out 3G services because BT gained a sizable amount of spectrum in European 3G auctions. They also would save on infrastructure costs.

Still, some analysts do not believe merging now would benefit either carrier.

"The challenge will be making it work organizationally, while maintaining flexibility to be able to pursue other interests," said Adam Zawel, an analyst for The Yankee Group. "At this point, it makes more sense for them to have a close relationship rather than merging. It is not worth the hassle when alliances can achieve a lot."

Despite the skepticism, Baca maintains that the industry should take a closer look at the core business of AT&T and BT.

"They each have a lot of revenue, access to customers and larger customer bases," he said. "If they find a way to build on this, it could be a good thing."

Still, a BT/AT&T combination would need to decide what kind of company it wants to be and establish a target customer base, Baca said. "Each no longer is the [sole] phone company and they need a coherent strategy."

While both carriers recognize the advantages of hooking up, there will be logistical challenges if they merge.

"Although it is easy to create a joint venture, it is tough to manage one," Norcross said. There will be difficulties now if a merger does take place, but such a deal would be more about future benefits than short-term rewards, Norcross said.