SBC Is Near Deal To Acquire AT&T For $16 Billion

"Obviously, if SBC buys AT&T, it makes SBC a direct competitor to Verizon" and other regional phone companies, said Drake Johnstone, an analyst with Richmond-based Davenport & Co.

One scenario is for Verizon to go after Sprint, trying to derail Sprint's pending merger with Nextel, and even paying a $1 billion break-up fee to do so, Johnstone said. By acquiring Sprint, Verizon would accomplish two things: It would become a stronger competitor against SBC, and could block a potentially powerful Sprint-Nextel from threatening its wireless business, he said.

Ashburn-based MCI could also become a target for takeover, possibly by BellSouth, which owns 40 percent of Cingular, but would be looking for a partner that makes it a viable competitor to the combined SBC and AT&T, Johnstone said. In recent years, SBC and BellSouth have had private discussions about possibly buying MCI.

AT&T, commonly known for a long time as "Ma Bell," spent decades building a copper-based phone network that reached into nearly every household, and its black rotary dial phones were ubiquitous. It enjoyed a monopoly until 1984, when a federal judge separated its long-distance and local phone businesses, a move creating the regional phone companies that would become SBC, Verizon, BellSouth and Qwest Communications International Inc.

Through the late 1990s AT&T remained a powerful competitor until it found itself pitted against its offspring after regulators allowed the regional phone giants to get into the long distance business. As a condition of that permission, the regional companies were required to lease their local lines to rivals, including AT&T, at deep discounts.

AT&T and MCI quickly became the two largest leasers of those lines and fought bitter political and regulatory battles to preserve their right to stay in the local phone business. They ultimately failed when regulators decided to phase out the discounts, and both AT&T and MCI effectively gave up on their consumer business and started to focus instead on selling phone and Internet services to corporate customers.

The marriage of AT&T and SBC was once considered an impossibility, given their genesis. But the combination faces fewer obstacles now because of the steady erosion of AT&T's business.

"The residue of AT&T . . . can be swept up by SBC because they're a non-competitor," said former Federal Communications Commission chairman Reed Hundt, who had derailed talks of a $50 billion SBC-AT&T merger in 1997 by calling such a deal "unthinkable." SBC already enjoys a virtual monopoly in its local territories and it is making fast inroads into AT&T's dying long-distance business, so antitrust would not likely be a concern, he said.

Still, the deal may not sail through, other people predicted. SBC officials are concerned that European regulators may object to the merger, said a source close to AT&T, as antitrust officials did when WorldCom Inc., now renamed MCI, failed in its bid to merge with Sprint in 2000.