Why did Cingular pay so much?


ANALYSIS: In the end, no amount would have been big enough for SBC and BellSouth, the corporate parents of Cingular. This was their one chance to make a big splash and grab the only growth business in the telecom markets. My suspicion is that this deal was driven purely by SBC, which has been an aggressive acquirer before in the wireline industries. It owns 60% of Cingular and has been a proponent of the GSM technology used by the company. With its wireline local business going the way of Red Sox fortunes, SBC have seen the light. (Read my Business 2.0 column from two weeks ago!) Of course SBC has a solid cash flow and the ability to borrow more cash to fund a deal. BellSouth has the same growth problems in its wireline business as SBC. Cingular believes that with such large scale, they can now have cost savings of around $1billion in 2006, and $2 billion per year there after.

So what comes next? The popular bet is that Sprint would be the next in line for consolidation. Technology Business Research analyst Chris Foster believes that
Sprint FON/PCS is not in a financial position to be an acquirer; the company spent most of 2003 retrenching and is now engaged in cost cutting in an effort to reach profitability. And the likely acquirer could be Verizon Communications as it want to maintain market leadership. Given that Sprint PCS and its parent company are becoming one again, chances are this could happen. Verizon has been lusting to go after the long distance market, and yet at the same time get bigger in the wireless business.

Of course, Sprint Corp., could become a target for BellSouth which has been wanting to get into the long distance business. It of course brings back Gary Forsee to the BellSouth fold, and give BellSouth a chance to get out from under SBC’s yoke and become a wireless carrier in its own right.

My Past Coverage from Business 2.0
* The Wireless Migration
* Take That Number and Run
* Gulp
* The Next Big Thing

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