Cingular's $41 Billion Offer Wins Bidding for AT&T Wireless
By ANDREW ROSS SORKIN
Published: February 17, 2004
Cingular Wireless, the second-largest wireless telephone operator in the United States, made a stunning $41 billion last-minute bid in the middle of the night to win an auction for AT&T Wireless. The deal creates the largest wireless carrier in the United States and reshapes the ferociously competitive wireless telephone market.
The outcome is a dramatic turn of events because it had appeared only hours earlier late on Monday night that AT&T Wireless, the third-largest wireless operator in the United States, was near a deal with the Vodafone Group of Britain.
Vodafone had indicated last evening that it was willing to raise its $38 billion bid and was planning to meet this morning to approve a new bid. Cingular had steadfastly refused to increase its offer, privately calling a higher bid “fiscally irresponsible,” and by late Monday had sent its executives and advisers home thinking that they had lost.
But in a daring game of brinksmanship, Cingular's parent companies, BellSouth Corporation and SBC Communications, hastily convened board meetings by conference call at 1:30 A.M. in New York and decided to approve the submission of a final knockout offer for AT&T Wireless while most of Vodafone's management and board were still sleeping.
Cingular submitted its final bid of $15 a share -- far higher than anybody ever expected the auction would go -- to AT&T Wireless at 2 A.M. The take-it-or-leave-it offer was accepted and approved by AT&T Wireless at near 3 A.M., blindsiding Vodafone just as its was about to begin its own board meeting this morning in Britain.
Cingular's bold maneuver hinged in large part on using the five-hour time difference between the United States and Britain to catch Vodafone's executives while they were literally asleep.
The sale to Cingular is the first sign of long promised consolidation in an industry that has suffered from overcrowding. While the deal will likely help the profitability of industry -- Cingular estimates the combination will save them as much as $15 billion -- it may mean higher prices for consumers in the long term and thousands of layoffs of overlapping positions at both AT&T Wireless and Cingular.
Still, the intensity of the ultra competitive landscape has been a mixed blessing for consumers. They have gotten lower prices and rich incentives for signing up with a wireless provider. But the effort by competitors to rapidly deploy their networks to fulfill the demand has often led to poor service quality and shoddy customer care.
The transaction is expected to put even more pressure on rivals to merge, triggering a rash of more deal making. Vodafone, in particular, is expected to make a deal in the United States, where it currently has a 45 percent stake in Verizon Wireless but has long sought control of its own carrier.
The auction of AT&T Wireless, with its 22 million customers across the country, comes at a time of intense competition for the wireless phone industry, which has been engaged in heavy price wars and marketing campaigns.
The battle is over billions of dollars in annual subscription fees. And the business is expected to grow more lucrative over the next five years as wireless providers roll out high-speed data access, allowing them to charge fees for providing Internet service.
In addition, the United States market is considered less saturated than many markets in Europe and Asia, offering strong growth potential.
But intense price-cutting has made an already difficult business that much more so. The competition heightened late in November, when federal rules went into effect that allow mobile phone customers to take their phone numbers with them when they switch providers. Some market researchers projected a flood of defections from carriers, but the effect has been somewhat muted, with roughly a million people switching, analysts said.
Still, the so-called portability rules gave some sense of the company's relative strengths. Analysts said Verizon Wireless and Nextel Communications fared particularly well. Notably, AT&T Wireless appeared to falter, losing more customers than its rivals, industry analysts said.
Last quarter, the company added 128,000 subscribers. That compared with 642,000 for Cingular, and 390,000 for Sprint. Verizon Wireless added 1.5 million.
The troubles exacerbated the struggles of AT&T Wireless, once the industry's strongest brand name. Over the last year, it has had technical and operations problems, though company executives maintained that the problems were isolated cases and not caused by systemic problems.
Executives also said the recent lapses were not the reason AT&T Wireless was put up for sale. Rather, they said, because of changing dynamics in the market, the time seemed right to gain an optimum price, and, in turn, to recapture some of the tens of billions of dollars in equity the company has lost in recent years.
AT&T Wireless went public in April 2000. Its stock price briefly rose into the mid-30's and then dived along with much of the market, including its wireless competitors.
Among the tricky dynamics now facing AT&T Wireless is that it has been a stand-alone company, splitting off from AT&T in 2001.
Around the same period, other wireless competitors found themselves becoming part of larger telecommunications conglomerates. Bell Atlantic and what was then Vodafone AirTouch merged and, in 2000, renamed the company Verizon Wireless. The same year, SBC Communications and BellSouth merged their wireless operations into Cingular Wireless.
In each case, the mobile providers had parent companies with deep pockets, and the parents wound up with the ability to use their newfound scale to cut costs and squeeze equipment suppliers into selling to them at lower prices.
The merged companies leapfrogged AT&T Wireless, leaving it in third place measured by subscribers, and struggling to retain brand-name prominence.
Wall Street analysts have had mixed views in attributing blame for the recent problems of AT&T Wireless. Some have blamed the company's management, and its chief executive, John D. Zeglis. But others have said that these can be worked out, leaving a fundamentally sound company.
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