Yesterday, Fool contributor W.D. Crotty said, "No" to the just-announced acquisition by SBC Communications
With all the bad news from Ma Bell over the years, it's true that it might be hard to argue for AT&T as an acquisition target. The business founded by Alexander Graham Bell 130 years ago is eroding. The long-distance phone company's revenue is expected to fall by 13% next year.
Nevertheless, I disagree with W.D. I think this could provide a good buying opportunity for SBC.
Left to its own devices, AT&T may not be worth much. But if SBC can put a brake on AT&T's troubles, that could translate into a good deal.
Here is what SBC gets from the deal:
Buying AT&T, SBC breaks into the top spot in the corporate long distance market, an area with few serious competitors. Remember, MCI
SBC gets a fresh supply of cash. AT&T produces plenty of the stuff -- about $3.7 billion in 2004. This could be used to trim some of SBC's $27 billion in debt. Or it could come in handy when paying for costly fiber networks needed to deliver TV services and fend off Comcast
Then there's the AT&T brand name. Sure, the AT&T brand has been bruised over the last couple of years, but it's still a respected household name and worth an awful lot -- possibly $5 billion to $10 billion. Just imagine AT&T's long-distance, SBC's local and Internet services, and 60%-SBC-owned Cingular's wireless offerings all sold under the same trusted AT&T marquee.
Besides, AT&T isn't all that expensive. SBC executives believe they can reap huge cost savings and synergies from the deal. Indeed, if SBC can stem the decline in AT&T's profits by, say, a third, it is still only paying about five times next year's cash flow for AT&T.
Admittedly, AT&T is running poorly and looks like a clunker. But look under the company's hood and you can find some valuable parts -- at a pretty good price -- that can be put to work somewhere else. SBC might just be the company to make something of them.
Fool contributor Ben McClure doesn't own shares of any of the companies mentioned here.
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