And then there was one, 4/26/99

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This story appeared on Network World Fusion at www.nwfusion.com/nw200/200merger.html

Industry watchers knew 1998 was going to be interesting on Jan. 9, when venerable AT&T plunked down $11 billion for renegade Teleport Communications Group.

By month's end, when spunky Compaq bid $9.6 billion for patriarchal Digital Equipment, it was clear anything could happen.

And it did. Undaunted by skittish Asian markets, network service and equipment providers announced one big deal after another. Bell Atlantic wants GTE. SBC Communications covets Ameritech. Nortel Networks gets Bay Networks. And Cisco folds in its usual slew of companies.

AT&T alone racked up a $64 billion acquisition bill, helping maintain its No. 2 spot on the 1998 Network World 200 and making the company one of the year's power shoppers. Even as the carrier lobbies for unregulated local markets, it has hedged its bets with the $11 billion purchase of Teleport, a competitive local exchange carrier that provides unfettered access to local-loop voice traffic, and its $48 billion bid for cable company Tele-Communications, Inc. (The remaining $5 billion went to the purchase of IBM's Global Network business.)

While the massive AT&T operates on an unrivaled scale, its strategy typifies that of a number of service providers looking to expand their geographic reach and get into local - or long-distance, as the case may be - markets. SBC, for instance, kicked off its year by announcing the $4.4 billion acquisition of local and long-distance service provider Southern New England Telecommunications. Not four months passed before the carrier, which already had digested Pacific Bell, was after Ameritech, as well. That $61.4 billion merger still awaits regulatory approval.

And Bell Atlantic, its NYNEX acquisition long complete, announced in July its intent to acquire GTE for $52.8 billion. The object of Bell Atlantic's desire is GTE's well-established local, long-distance, wireless and Internet businesses.

Even alternative carriers Qwest and Level 3 Communications got in on the action. Qwest's $4.1 billion acquisition of long-distance provider LCI International ranks among the larger deals of the year.And its acquisition strategy helped land it the No. 46 spot on our NW200 list.

The consolidation trend has raised eyebrows among antitrust observers. But some industry analysts don't see any reason to worry about lack of competition in this market. Indeed, little evidence exists that customers even want a larger playing field.

"Congress and the Federal Communications Commission got it wrong with the Telecommunications Act. Users would rather have their teeth drilled than have to deal with several providers," says Ken McGee, a vice president and research fellow at Gartner Group, in Stamford, Conn. "In five years of polling Fortune 1000 customers, I've heard no message louder than, 'I can't wait for the day when I can fire my local exchange carrier.'"

Meanwhile, the tension between "data" and "telecommunications" manufacturers continues to build and the acquisitions to mount. In fact, two of the biggest deals of the past 10 months are Nortel's $9.1 billion pickup of Bay Networks and Lucent's $20 billion bid for Ascend Communications.

By contrast, Cisco's acquisition activity seems positively modest - the vendor shelled out little more than $1.1 billion buying companies in 1998. Yet Cisco has shored up its expertise in some of the most promising technology areas. Through last year's acquisitions, it's gained access to voice-over-IP technology (Selsius Systems, $145 million), digital subscriber line equipment (NetSpeed, $265 million) and optical network products (PipeLinks, $126 million). It also inched its way from No. 27 to No. 21 on the NW200 list.

All in all, the network industry followed the lead of other markets. In 1998, mergers and acquisitions in the U.S. jumped overall to $1.6 trillion, from $1 trillion the previous year. Network transactions account for more than 14 % of the total market, according to Securities Data, a Newark, N.J., company that tracks mergers and acquisitions.

While it is difficult to be certain about what will happen next, industry watchers are bracing for an acquisition onslaught from overseas. In 1998, France's Alcatel, Sweden's Ericsson, Finland's Nokia and Britain's Cable & Wireless and British Telecommunications spent more than $5.5 billion on U.S. network companies. This year, these and other vendors are already closing in on that figure.

The question for 1999: What company is next? 3Com, perhaps? Maybe Cabletron?

Cooper and Silver are reporters for the Washington News Bureau, in Washington, D.C. They can be reached at washbureau@aol.com.