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Businesses Take Stock In Merger, And Downsizing

Tue., April 2, 1996

Bigger better be better.

Two “Baby Bell” phone companies Monday announced a $16.5 billion merger. SBC Communications Inc. will buy Pacific Telesis Group for that much in stock and become the second-largest telecommunications company after AT&T; Corp.

Simultaneously, Aetna Life & Casualty Co. offered $8.9 billion in cash and stock to buy U.S. Healthcare Inc., a big health maintenance organization.

Just Sunday, Chase Manhattan Corp. and Chemical Banking Corp. completed a $13 billion merger that capped a string of bank marriages.

And doesn’t every corporation think it has too many employees? Perhaps the only way to play the stock market game of higher share prices spawned by widespread firings is to acquire more employees and let them go.

Analysts say there will be more Bell mergers. The SBC-PacTel deal comes less than two months after a sweeping overhaul of telecommunications law opened competition among phone and cable companies.

Shares of five other Bell stocks, from Bell Atlantic Corp. to US West Inc., gained today in anticipation. Why not, after SBC offered Pacific Telesis shareholders 41 percent more than their stock was worth Friday? Pac Tel shares jumped $6 to $33.75. But SBC shares fell $2.75 to $49.88-1/2. There seems to be a rationale for these mergers. Unleashed telecommunications will compete fiercely and must be big to survive.

But aren’t the phone companies big enough already? The seven regional phone monopolies created by the divestiture of AT&T; Corp. in 1984 all are among the biggest U.S. companies ranked by stock market value.

PacTel will provide SBC with phone connections to fast-growing Asian markets and licenses for wireless communications, analysts said. Still, isn’t SBC big enough to do this on its own? Its stock market value is $30.2 billion. Will Pacific Tel’s $14.4 billion market capitalization add that much?

Merging Bells might consider the example of their old parent. Since the government forced AT&T; to break up, it has acquired computer company NCR Corp. a bad deal - and McCaw Cellular Communications Inc., the biggest wireless phone company - a transaction yet to be judged.

AT&T; now plans a second historic divestiture, spinning off NCR and its own phone-equipment manufacturing unit. Everything about AT&T; in recent years been historic - except its profit growth.

Aetna Life is making big changes too. It plans to sell its casualty insurance business to rival Travelers Group Inc. for $4 billion and, after today’s announcement, become the largest provider of managed health care.

Aetna sells health-care insurance to several big companies but it has lacked a big HMO, which tries to hold down health-care costs by controlling what it pays to doctors and hospitals. The insurance company said it expects to achieve $300 million in annual cost savings in 18 months.

Wall Street loves this trend. Securities firms get huge fees for arranging mergers. Money managers buy shares of companies that look like takeover targets. Today’s two big merger proposals triggered a 1.27 percent gain in the Standard & Poor’s 500 Index.

The defense industry needed to adapt to lower military spending. Analysts says banks had too many branches and workers given their stunted revenue growth. Maybe most of these mergers will work out.

But the Baby Bells may be pushing the envelope. Whatever happened to the idea that smaller, nimbler companies are the most competitive?

Tags: analysis

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