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Editorials, Tuesday, 02/22/2000

SBC Jumps Into B2B with Sterling Commerce Merger
By Cindy Christ

SBC Communications, the nation's No. 1 local phone carrier, is acquiring Sterling Commerce in an all-cash deal valued at $3.9 billion amid efforts to strengthen its position in the exploding business-to-business electronic commerce market.

SBC (SBC) said Tuesday it will pay $44.25 per share to buy the e-business software and services provider, an offer valuing Sterling Commerce (SE) shares at a 40 percent premium over Friday's $31.56 close.

Shares in Sterling Commerce took off in pre-market trading, hitting $43.25 before the opening bell.

The deal is expected to close by late March or in the second quarter, the companies said.

SBC said it was making the acquisition as part of a series of strategic moves to create a full range of data and Internet services.

"This instantly gives SBC the skill sets, software, products and services needed to take the lead in one of the most rapidly growing segments of the e-commerce market," said Edward Whitacre Jr., SBC chairman and CEO, in a statement.

"Sterling Commerce's highly skilled information technology teams also will help us in the future as we continue to capitalize on Internet-driven opportunities," he added.

According to International Data Corp., the business-to- business e-commerce industry is expected to grow from $200 billion in 2000 to $2.5 trillion by 2004.

Columbus, Ohio-based Sterling Commerce specializes in developing e-commerce communities where multiple buyers and sellers conduct online transactions, exchange goods and services, collaborate on business opportunities, and share information.

Last year, Sterling Commerce reported fiscal year revenues of $561 million and net income of $138. The company's client roster includes more than 45,000 customers worldwide and 97 percent of Fortune 500 companies, including Wal-Mart, Johnson & Johnson, Sony and BMW, among others.

SBC said the deal would add to its growth rate in the data portion of its business.

"We're expecting the data part of our communications business to grow at very high rates of 30 percent per year and higher," said Rich Dietz, president of SBC's Global Markets group, in an interview with CNBC.

SBC also said Sterling Commerce's services would help it streamline some of its business processes and cut costs.

For Sterling Commerce, the merger boils down to adding new customers.

"SBC's powerful distribution channels and strong relationships with hundreds of thousands of customers, especially small- and medium-sized businesses which typically aren't yet e- businesses, will considerably strengthen our ability to serve more customers than ever before," said Warner Blow, Sterling Commerce CEO, in a statement.

Although the merger propels SBC into the red hot B2B sector, the move didn't inspire investors, who sent shares in the San Antonio-based teleco to a new 52-week intraday low of $35.63.

SBC has been on a slow and steady slide since December, despite strong efforts to dominate some of the fastest growing communications markets.

The firm is already the nation's leading provider of Digital Subscriber Line service, which allows users to access and surf the Web at speeds 50 times faster than standard dial up modems. In October, SBC announced a new, $6 billion initiative to extend DSL service to 80 percent, or 77 million, of its customers by 2002.

To boost subscribers, the company recently cut its monthly fee for standard DSL service by about $10 to $39.95 and waived equipment and installation fees.

But even that didn't help its stock price. The same day price cuts were announced, a decision by the U.S. Justice Department to block SBC from providing long distance service in Texas sent shares on another dive.

Despite the months-long downturn, analysts are beginning to project big returns for old-line companies like SBC that have made aggressive moves into new technologies.

Last week, Merrill Lynch chief analyst Adam Quinton expressed bullish sentiment for the big telecos in a conference call with clients.

In a research alert, the firm said it restarted coverage of SBC Communications with "intermediate-" and "long-term buy" ratings and a $65 price target, noting that concerns about dilution from investments in high-speed Internet access or wireless service have put shares under pressure for the last four months.

Analysts estimate that market growth for big telecos like SBC will pick up from high single digits to double digits as demand for new services takes off.

"By the end of the year, a number of companies will start to see some material benefits from the data initiative," Quinton told clients, according to CBSMarketWatch.com.

Quinton also said that SBC's domestic and international assets make it an attractive partner.

"This is not a zero-sum game. While there can be relative winners and losers, it is still possible to have everybody be an absolute winner as the market grows, picks up and remains very healthy," he said.

 


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