TELECOMMUNICATIONS MERGERS AND ACQUISITIONS

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TELECOMMUNICATIONS MERGERS AND ACQUISITIONS

• NARUC Staff Subcommittee on Accounting and
  Finance
• Albuquerque, New Mexico
• April, 2007
• Denise Parrish, Wyoming Office of Consumer
  Advocate, WY PSC
• dparri_at_state.wy.us [phone]

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1984 Regional Bell Operating Companies

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A FEW OF THE MERGERS

• 1997 1999
• SBC and Ameritech
• WorldCom and MCI
• Bell Atlantic and NYMEX
• SBC and Pacific Telesis

• 2000 2001
• AOL and Time Warner
• SBC and Bell South
• MCI and Sprint
• Bell Atlantic and GTE
• US WEST and Qwest

• 2002 - 2004
• Cingular Wireless and ATT

• 2005 - 2006
• ATT and Bell South
• Verizon and MCI
• SBC and ATT
• Sprint and Nextel
• AllTel and Western Wireless

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2007

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January 31, 1997

• Pacific Telesis and SBC Communications
• FCC Opinion and Order
• . our focus here is on reductions in
  competition that may result from the proposed
  transfer A demonstration that benefits will
  arise from the transfer is not, however, a
  prerequisite to our approval, provided that no
  foreseeable adverse consequences will result from
  the transfer.

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June 19,1997

• FCC Press Release
• FCC Chairman Reed Hundt Calls Combination of ATT
  and an RBOC Unthinkable
• Combining the long distance market share of ATT
  in any RBOC region (even as it may be reduced by
  RBOC entry) with the long distance market share
  that reasonably can be imputed to the RBOC yields
  a resulting concentration that is unthinkable.

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August 14, 1997

• NYNEX and Bell Atlantic FCC Opinion and Order
• In order to find that a merger is in the public
  interest, we must, for example, be convinced that
  it will enhance competition. A merger will be
  pro-competitive if the harms to competition are
  out weighed by benefits that enhance competition.
  
• We must be especially concerned about mergers
  between incumbent monopoly providers and possible
  rivals during this initial period of
  implementation of the 1996 Act.
• We also note that we are concerned about the
  impact of the declining number of large incumbent
  LECs, on this Commission's ability to carry out
  properly its responsibilities Reducing the
  number of Bell Companies makes it easier to
  coordinate actions among them, and increases the
  relative weight of each company's actions on
  average performance.
• Because we approve this merger with conditions,
  thereby reducing the number of independently
  controlled large incumbent LECs, future
  applicants bear an additional burden in
  establishing that a proposed merger will, on
  balance, be pro-competitive and therefore serve
  the public interest, convenience and necessity.

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AUGUST 14, 1997

• NYMEX and Bell Atlantic (Continued)
• As competitive concerns increase, it becomes
  significantly more difficult for applicants to
  carry their burden to show that the proposed
  transaction is in the public interest. A merger
  that in the relevant markets, eliminated a
  competitor with even greater assets and
  capabilities then Bell Atlantic would present
  even greater competitive concerns.
• For some potential mergers, the harm to
  competition may be so significant that it cannot
  be offset sufficiently by pro-competitive
  commitments or efficiencies.
• We often rely, for example, on cross-carrier
  comparisons as strong evidence as to technical
  feasibility or reasonableness. The Bell
  Companies, being of similar size, history, and
  regional concentration have, to date, been useful
  benchmarks for assessing each other's
  performance.

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September 14, 1998

• WorldCom and MCI FCC Opinion and Order
• Commission noted in the Bell Atlantic/NYNEX
  Order, "as the harms to the public interest
  become greater and more certain, the degree and
  certainty of the public interest benefits must
  also increase commensurately in order for us to
  find that the transaction on balance serves the
  public interest, convenience, and necessity."
  This sliding scale approach suggests that, where,
  as here, potential harms are unlikely,
  Applicants' demonstration of potential benefits
  need not be as certain.
• Although we do not believe that Applicants have
  provided sufficient evidence to support all of
  their claims, we conclude that Applicants have
  made a sufficient showing here of potential
  benefits to find that, on balance, the merger is
  in the public interest, convenience, and
  necessity.
• Because, as described below, we find that the
  merger will result in a stronger competitor, we
  need not resolve whether the Applicants have
  fully substantiated all of their alleged cost
  savings in order to find that this merger is, on
  balance, in the public interest.

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December 10, 1998

• FCC Commissioner Michael Powell Speech
• I worry that the public interest standard is a
  place perfect for nurturing regulators anxiety
  about protecting often overprotecting the
  public good.
• Truthfully, the public interest standard can be
  largely self-fulfilling decide what you want to
  do and say it is in the public interest to do so.

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December 10, 1998

• Commissioner Powell Guiding Principles for
  Mergers
• Dont Squeeze Just Because You Can.
• Would you actually block the merger absent the
  condition you are exploring?
• Merger Conditions are Not a Substitute for
  Rulemaking.
• Merger conditions need to be merger specific.
• As to voluntary commitments, there is nothing
  voluntary in a regulatory relationship. Merging
  parties are not altruists.
• Merger Review is Not an Opportunity to Substitute
  the Regulators Vision of the Marketplace for
  That of Market Participants.
• Regulators have a persistent tendency to
  undersell the ability of market forces to address
  social, political and public policy objectives.

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January 20, 1999

• The Consumer Case Against the SBC-Ameritech
  Merger by Consumers Union
• Actual competition will be eliminated.
• Likely competition in other areas is reduced.
• It is difficult for competitors to enter local
  markets in the SBC Ameritech area.
• The merged entity would have a greater ability to
  block entry of CLECs into its expanded market.
• Targeted out-of-region markets are already those
  with the most competition.
• Claims that competitors will have to retaliate in
  the face of the SBC/Ameritech entity is illogical
  and inconsistent with past RBOC behavior.
• SBC has shown its willingness to engage in
  anticompetitive and abusive practices.

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January 20, 1999

• The Consumer Case Against the SBC-Ameritech
  Merger (Continued)
• Regulators and antitrust officials have been
  presented with a vast array of empirical evidence
  that demonstrates that the merger will be a
  devastating blow to the feeble forces of
  competition that have been struggling to become
  established in the market for local exchange and
  exchange access service.

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October 6, 1999

• Ameritech and SBC FCC Opinion and Order
• We conclude that approval of the applications to
  transferis in the public interest because such
  approval is subject to significant and
  enforceable conditions designed to mitigate the
  potential public interest harms of the merger
• We concludethat the proposed merger of these
  RBOCs threatens to harm consumers of
  telecommunications services The asserted
  benefits of the merger, absent conditions, do not
  outweigh these significant harms, as described
  within.
• The proposed conditions, however, change the
  public interest balance.

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October 6, 1999

• Ameritech and SBC (Continued)
• Harms
• Remove one of the most significant potential
  competitors
• Substantially reduce the Commissions ability to
  implement the market-opening requirements of the
  Act by comparative practice oversight methods.
• Increase the incentive and ability of the merged
  entity to discriminate against its rivals,
  particularly with respect to advanced services.

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October 6, 1999

• Ameritech and SBC (Continued)
• Conditions will further the following goals,
  assuming satisfactory compliance
• Promoting Advanced Services Deployment
• Ensuring that In-Region Local Markets are More
  Open
• Fostering Out-of-Region Competition
• Improving Residential Phone Service
• Enforcing the Merger Order

THESE BECOME THE STANDARD SET OF GOALS THAT
MERGER CONDITIONS ARE INTENDED TO MEET. THESE
ARE CITED IN NUMEROUS FUTURE MERGER ORDERS.
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June 16, 2000

• GTE and Bell Atlantic FCC Opinion and Order
• absent conditions, the merger of Bell Atlantic
  and GTE will harm consumers of telecommunications
  services by
• (a) denying them the benefits of future probable
  competition between the merging firms
• (b) undermining the ability of regulators and
  competitors to implement the pro-competitive,
  deregulatory framework for local
  telecommunications
• (c) increasing the merged entitys incentives and
  ability to discriminate against entrants into the
  local markets of the merging firms.

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June 16, 2000

• GTE and Bell Atlantic (Continued)
• Conditions designed to
• Mitigate the potential public interest harms
• Enhance competition in the local exchange and
  exchange access markets
• Strengthen the merged firms incentives to expand
  competition outside of its territories.

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November 17, 2005

• SBC and ATT FCC Opinion and Order
• This merger would combine one of the largest
  regional Bell Operating Companies with one of the
  largest providers of interexchange and
  competitive local service.
• These benefits, which are likely to flow to
  consumers, relate to
• Enhancements to national security and government
  services
• Efficiencies related to vertical integration
• Economies of scope and scale
• Cost savings

This language becomes a standard in describing
the benefits from this and other mergers
described in the future.
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November 17, 2005

• SBC and ATT (Continued)
• Moreover, to the extent that the merger increases
  concentration in relevant markets, we find that
  the public interest benefits of the merger
  outweigh any potential public interest harms.

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November 17, 2005

• SBC and ATT (Continued)
• our analysis of the competitive effects of the
  merger, which focuses on the following key
  services
• Special Access Competition
• Retail Enterprise Competition
• Mass Marketing Competition
• Internet Backbone Competition
• Wholesale Interchange Competition
• International Competition
• Applicants Commitments

The order continues the practice of reciting the
impact on each of these markets and / or
services.
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November 17, 2005

• Verizon and MCI FCC Opinion and Order
• This merger would combine one of the largest
  regional Bell Operating Companies with one of the
  largest providers of interexchange and
  competitive local service.
• we conclude that significant public interest
  benefits are likely to result from this
  transaction.
• These benefits, which are likely to flow to
  consumers, relate to
• Enhancements to national security and government
  services
• Efficiencies related to vertical integration
• Economies of scope and scale
• Cost savings

Same language as in SBC/ATT Order
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March 26, 2007

• ATT and BellSouth FCC Opinion and Order
• This merger would combine two regional Bell
  Operating Companies (BOCs). ATT and BellSouth
  offer competing services in certain
  communications markets, and BellSouth supplies
  wholesale inputs relied upon by ATT and other
  competitors in various retail markets. Thus, the
  proposed merger requires us to examine its
  effects on competition which are both
  horizontal and vertical in nature in a wide
  range of significant communications markets.

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March 26, 2007

• ATT and Bell South (continued)
• We further conclude that significant public
  interest benefits are likely to result from this
  transaction. These benefits, which are likely to
  flow to consumers, relate to
• accelerated broadband deployment
• enhancements to Multichannel Video Programming
  Distributor (MVPD) and programming competition
• national security,
• disaster recovery, and government services
• unification of Cingulars ownership
• efficiencies related to vertical integration
• economies of scope and scale and
• cost savings.

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DEPRECIATION RESERVE RATIOS

• For Companies Subject to FCC Represcription
  Process

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PLANT INVESTMENT LARGE ILECs

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PLANT INVESTMENT MID-SIZED ILECs

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PLANT PER ACCESS LINELARGE ILECs

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PLANT PER ACCESS LINEMID-SIZED ILECs

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TOTAL TROUBLE REPORTS PER MONTH PER 100 LINES

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INITIAL TROUBLE REPORTS PER 1,000 LINES

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RESIDENTIAL REPAIR DISSATISFACTION

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RESIDENTIAL INITIAL OUT-OF-SERVICE REPAIR
INTERVALS (HOURS)

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CUSTOMER SATISFACTIONVERIZON BELL ATLANTIC

• Percent Dissatisfied Residential

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ACCESS LINE COUNTS
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CLEC LINES

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CLEC LINES