Merging musings

Some thoughts as consolidations scour your industry:

Fear and envy. M&A activity among large companies usually has more than a single cause. But the current M&A wave among telecom service providers clearly is motivated largely by fear. This fear cuts across market segments. Companies like Ameritech, fundamentally a wireline local exchange company, believe they are too small to succeed in the more competitive future. So management does a deal, and Ameritech becomes a part of SBC.

The AT&T/BT long-distance deal has similar roots. AT&T fears it will never achieve its international goals by itself. So it cuts a deal with BT and, seemingly, that problem is resolved.

Likewise AT&T/TCI. Stymied strategically at the local exchange, AT&T agrees to buy TCI to outflank its problem.

Like personal fear, corporate fear tends to be a healthy reflection of problematic objective realities. AT&T really has failed to develop its international business to the degree it had hoped. AT&T really has not been able to get past the local exchange hurdle. Ameritech would find it difficult at best to independently develop a national business starting from its current foundation.

But personal fears often reflect a distorted image of difficult circumstances, leading directly to poor personal decision-making. Might the same thing be true of certain telecom corporations?

All at once. Look not to this space for financial insight. Wall Street is not a familiar locale. But the Wall Street experts I read, though they seem to agree on nothing else, agree that the Street suffers from the worst kind of herd mentality.

The Wall Street telecom herd is stampeding these days. During a stampede, the herd thunders in the same direction-but never in a straight line.

Suddenly, as if directed by a single invisible intelligence, the beasts change direction. Later, they change direction again, and again. Finally, exhausted, the survivors run out of energy and the stampede is over.

A stampede is violent, irrational behavior that, viewed from the outside, seems to be orderly. But it isn't orderly. It's capricious, destructive, unpredictable.

If you are near a stampede, there isn't a safe place to stand.

BT again. The U.S. telecom industry can be divided neatly into two groups. The first group has at one time or other entered into an agreement to partner with BT (via acquisition or some less permanent arrangement), although some agreements were never consummated. The second group has not.

All U.S. telecom companies began in the second group. The second group remains larger than the first. But the gap is steadily narrowing.

Who in the first group has benefited as a result of leaving the second group?

The soft spot. Bell Atlantic and GTE agree to join forces because their management teams conclude that the two are stronger together than they are separately. They carefully evaluate markets, current vulnerabilities, service territories, opportunities and investments in unregulated businesses, management teams and so on. They are responsible, shrewd people intent on taking productive decisions.

But this decision doesn't touch the key weakness of both corporations, namely that both GTE and Bell Atlantic-and to a large extent their key managers-come from a monopoly heritage. Merging two monopolists-a simplification, true, but a useful simplification-creates a bigger, more bureaucratic monopolist.

The same, of course, is true of the SBC/Ameritech deal. A bigger monopolist is not necessarily a more competitive monopolist. If anything, the opposite is likely tobe the case. This era in telecommunications will reward shorter decision cycles, flatter organizations, more entrepreneurial creativity, quicker time to market.

Speed and agility, not bulk and muscle. Key questions to ask any time even one LEC is involved in M&A: How does this speak to that competitive reality? How does this help end monopolistic thinking?

Two strikes. In 1998, WorldCom won the industry's unofficial but coveted Bold Management Decisions of the Year Award. AT&T looks like it will run away with the 1999 prize, even if it doesn't do anything between Labor Day and New Year's Eve.

Two quick predictions: TCI won't happen. And ultimately, AT&T and its shareholders will be thankful. BT will. And AT&T and its shareholders will regret it.