TELECOMMUNICATIONS MERGERS AND ACQUISITIONS

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@state.wy.us (307) 777-5743 2 1984 Regional Bell Operating Companies 3 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 AT&T • 2005 - 2006 AT&T and Bell South Verizon and MCI SBC and AT&T Sprint and Nextel AllTel and Western Wireless 4 2007 5 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. 6 June 19,1997 • FCC Press Release FCC Chairman Reed Hundt Calls Combination of AT&T and an RBOC “Unthinkable” “Combining the long distance market share of AT&T 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.” 7 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. 8 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. 9 September 14, 1998 • WorldCom and MCI – FCC Opinion and Order – Commission noted in the Bell Atlantic/NYNEX Order, "[a]s 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. 10 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.” 11 December 10, 1998 • Commissioner Powell Guiding Principles for Mergers – Don’t 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 Regulator’s 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. 12 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 CLEC’s 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. 13 January 20, 1999 • The Consumer Case Against the SBCAmeritech 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. 14 October 6, 1999 • Ameritech and SBC – FCC Opinion and Order – We conclude that approval of the applications to transfer…is 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 conclude…that the proposed merger of these RBOC’s 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. 15 October 6, 1999 • Ameritech and SBC (Continued) – Harms: • Remove one of the most significant potential competitors • Substantially reduce the Commission’s 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. 16 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. 17 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 entity’s incentives and ability to discriminate against entrants into the local markets of the merging firms. 18 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 firm’s incentives to expand competition outside of its territories. 19 November 17, 2005 • SBC and AT&T – 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. 20 November 17, 2005 • SBC and AT&T (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. 21 November 17, 2005 • SBC and AT&T (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 Applicant’s Commitments The order continues the practice of reciting the impact on each of these markets and / or services. 22 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/AT&T Order 23 March 26, 2007 • AT&T and BellSouth – FCC Opinion and Order – This merger would combine two regional Bell Operating Companies (BOCs). AT&T and BellSouth offer competing services in certain communications markets, and BellSouth supplies wholesale inputs relied upon by AT&T 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. 24 March 26, 2007 • AT&T 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 Cingular’s ownership; • efficiencies related to vertical integration; • economies of scope and scale; and • cost savings. 25 DEPRECIATION RESERVE RATIOS • For Companies Subject to FCC Represcription Process 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1985 1990 1995 2000 2005 Reserve Ratio 26 PLANT INVESTMENT LARGE ILEC’s $ , 000 0, 000 0 450,0 00 , 000, 0 000 $350, 0, 00 50,00 2 0, 000 $ $ , 000 0, 000 0 150,0 0,000 00,00 $50,0 2004 ,000) 0,000 0 $(50, 0 2005 2006 Total Plant Net Plant 27 PLANT INVESTMENT MID-SIZED ILEC’s $40,000,000,000 $35,000,000,000 $30,000,000,000 $25,000,000,000 $20,000,000,000 $15,000,000,000 $10,000,000,000 $5,000,000,000 2004 2005 2006 Total Plant Net Plant 28 PLANT PER ACCESS LINE LARGE ILEC’s $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $1,109 $1,057 $1,044 $3,264 $3,096 $3,515 2004 Gross 2005 Net 2006 29 PLANT PER ACCESS LINE MID-SIZED ILEC’s $3,500 $2,897 $3,086 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $2,684 $914 $912 $911 2004 Gross 2005 Net 2006 30 TOTAL TROUBLE REPORTS PER MONTH PER 100 LINES 2.5 2 1.5 1 0.5 0 97 19 QWEST 98 19 99 19 00 20 01 20 AT&T 02 20 03 20 04 20 VERIZON 31 05 20 06 20 INITIAL TROUBLE REPORTS PER 1,000 LINES 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 Bell South AT&T Southwestern Qwest AT&T Ameritech AT&T SNET AT&T Pacific Verizon North & South 32 RESIDENTIAL REPAIR DISSATISFACTION 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 Bell South AT&T Southwestern Qwest AT&T Ameritech AT&T SNET AT&T Pacific Verizon North & South 33 RESIDENTIAL INITIAL OUT-OF-SERVICE REPAIR INTERVALS (HOURS) 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 Bell South AT&T Southwestern Qwest AT&T Ameritech AT&T SNET AT&T Pacific Verizon North & South 34 CUSTOMER SATISFACTION VERIZON BELL ATLANTIC Percent Dissatisfied – Residential 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 199 6 Installations 199 7 199 8 199 9 Repairs 200 0 200 1 200 2 200 3 Business Office 200 4 200 5 200 6 35 ACCESS LINE COUNTS 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 0 00 nJa 01 nJa 02 nJa 03 nJa 04 nJa 05 nJa 06 nJa ILEC Lines Mobile Wireless CLEC 36 CLEC LINES June 2000 June 2006 22% 35% 37% 36% 28% 42% Resold Lines UNE's CLEC Owned 37 CLEC LINES Te xa s2 Te 00 1 xa s2 Ca 00 6 lif or ni a Fl Fl Ca Ne Ne or or lif w w id id or Yo Yo a2 a2 ni rk rk a2 00 00 20 20 20 1 6 00 01 06 01 6 Resold UNE's Owned 38