New York Times:
June 30, 1999
$72 Billion Deal of Phone Giants Clears Big Hurdle
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By STEPHEN LABATON
ASHINGTON -- In an unusual regulatory approach, federal officials said Tuesday that they had tentatively agreed to approve the $72 billion acquisition of Ameritech Corp. by SBC Communications Inc. provided that the new company not only open its market to competition but also offer local telephone service in 30 cities outside its region.
Officials said the conditions were intended to drive down phone bills by encouraging competition in markets that have been dominated by one local phone company. SBC and Ameritech executives said Tuesday that regulators would impose stiff fines if the new company, which will be the nation's largest local telephone company, failed to offer residential and business telephone service in cities including Miami, Seattle and Boston within 12 months and New York, Washington and Phoenix within 18 months.
Although SBC said soon after the merger was announced that it intended to enter those cities, where federal officials hope it will become a giant competitor, the regulatory agreement speeds up its time frame. It also sets penalties as high as $2.2 billion for the company's failure to offer local phone service outside its existing territory or sufficiently open its markets to competitors.
The agreement reflects a fundamental shift in the approach regulators have taken in reviewing large mergers. The Ameritech-SBC deal will create a company with about 55 million local phone lines in 13 states, cutting a swath from Michigan to Texas and including Connecticut and California. Regulators have traditionally responded to such proposed corporate behemoths by blocking the deal or requiring divestitures, not expansions, of business units.
Officials acknowledged they agreed to the 28 conditions in the deal in part because of the heavy criticism of their approval of the merger of Bell Atlantic and Nynex two years ago, a deal that did not have such conditions and that consumer groups say has not significantly increased competition or lowered prices. The officials also said that the proposed agreement was an effort to fix the shortcomings of a 3-year-old law that was intended to deregulate the telecommunications industry and foster competition but has been unable to force the regional Bells to open their markets. Instead, the law has largely encouraged a wave of corporate mergers and a heavy consolidation of the industry that has raised concerns among some consumer groups.
The tentative accord is the product of three months of intensive negotiations between lawyers for the companies and the staff of the Federal Communications Commission, who were ordered by William Kennard, the agency's chairman, to find ways to encourage competition in the local telephone markets. The agency will give competitors and the public about a month to comment on the proposal before a final vote is taken by the commissioners. State regulators in Indiana and Illinois must also approve the acquisition before it can be closed.
Kennard applauded the work of the staff and indicated that he would most likely approve the deal. It would be highly unusual for a majority of the five commissioners, who were kept apprised of the negotiations, to reject the agreement.
"I am encouraged by SBC and Ameritech's commitment to open their markets to competition and their agreement to suffer stiff penalities if they do not," Kennard said. "Our paramount goal must be to hasten the day when consumers enjoy the benefits of more competition in local and long-distance phone service."
Executives at the two companies said that they were pleased to have resolved the issues and hoped to be able to complete the merger soon.
"It's fair to say that the merger is now in the home stretch," said James Ellis, senior executive vice president and general counsel of SBC. "The conditions are perhaps some of the most wide-ranging that any company has ever submitted to the FCC in order to win approval of this type of transaction. They answer fully the concerns that Chairman Kennard first raised last April. They are tough, they are fair and they are certainly enforceable."
But some consumer groups that had urged the FCC to block the proposed acquisition said the accord held little hope of actually increasing competition, particularly given the industry's history.
"Rather than block consolidation among monopolies and forcing the companies into the marketplace, we have a massive expansion of monopoly with an enormously complicated set of conditions that will take an army to police," said Gene Kimmelman, the co-director of the Washington office of Consumers Union. "We've never had local telephone competition, and to allow these companies to consolidate is an enormous public policy risk, and I believe a mistaken one."
Kimmelman also said that to the extent that SBC actually served new cities, it made economic sense for the company to offer service only to the high-end of the market, mostly businesses and residents now paying top rates.
"It defies the economic realities of the market that SBC would sign onto this deal at any significant cost to it," he said.
While other regional Bell and local exchange companies did not criticize the proposed agreement Tuesday, saying they needed time to study it, analysts said they expected it would not face serious obstacles.
"This is a win-win for almost everybody involved," said Scott Cleland, an analyst at the Legg Mason Precursor Group. "You will not see a lot of people trashing this because it has a little bit for everybody. The FCC gets a host of pro-competitive commitments and a way to enforce them with stiff penalties. The competitors get a lot of their favorite pet rocks that they have long sought. And SBC gets approval of its merger and it gets to control its own destiny."
Bob Atkinson, the lead government lawyer who negotiated the conditions, described them today as "substantial and unprecedented" and said they would "create irreversible market competition."
Atkinson said that the agreement would be enforced by an independent auditor approved by the FCC and paid for by SBC, formerly Southwestern Bell. Ameritech, based in Chicago, was originally formed by the joining of Bell companies in Illinois, Indiana, Ohio, Michigan and Wisconsin.
The proposed agreement requires SBC, based in San Antonio, to offer competitors in its territory steep promotional discounts of up to 32 percent for reselling their services and 25 percent for leasing the use of wires that run from SBC's switching centers to customers' homes. It also requires that SBC establish a separate corporate affiliate for offering high-speed Internet service on telephone lines. The affiliate would be largely independent of SBC and would have to be treated like any competitor of SBC.
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