AT&T's proposed megamerger may finally put it on the road to the telecommunications promised land

By GEORGE TABER /NEW YORK

ighty AT&T may have appeared to be the master of the telecommunications universe in recent years, but ever since Judge Harold Greene broke up "Ma Bell's" monopoly of the American telephone system in 1984, the phone giant has actually been a Gulliver held down by Lilliputian strings. The court gave AT&T control of long distance lines but left local service to seven regional "Baby Bells." AT&T could get your call from New York to New Delhi or from Atlanta to Athens, but the last kilometer of local service was hostage to the Baby Bells who could--and often did--extort a high price for a connection.

Now Gulliver has stirred. Last week, AT&T chairman C. Michael Armstrong announced the $48 billion takeover of Tele-Communications Inc., the second-largest U.S. cable system. In a field where billion-dollar deals have become du jour, the AT&T-TCI agreement is more than just another megamerger. It opens the way for AT&T to reach the telecom promised land where one company's wire will bring a host of services including telephone, cable television and the Internet into the home at warp speed and with easy access.

It has been a struggle to find a way to bypass the local companies, so that AT&T could take the phone call--and perhaps more importantly, all of the other new telecommunication services--from end to end. One ploy was to bet on new "wireless" technology to skip over the local carriers, which is why, back in 1994, AT&T spent $12.6 billion to buy McCaw, a leading cellular company. And last year the company publicly mooted a merger with SBC Communications Inc., one of the biggest of the regional phone companies spun out from under Ma Bell's skirt. Federal regulators, however, quickly nixed that deal before it got started.

After Armstrong took over as chairman last November, he stepped up the quest for a local service to link up with his existing long-distance lines, but appeared to be getting nowhere. When megadeals like the one involving MCI Telecommunications Corporation and WorldCom, Inc. were announced, Armstrong looked like the guy who would be left with no date for the big telecommunications party. Then in January he made his first significant move into local service with the $11.3 billion purchase of the Teleport Communications Group, which provides local phone and data communications services to businesses in 65 U.S. cities. It was a useful first step but still left AT&T on the sidelines in the rapidly converging telecommunications world. Armstrong kept talking and dealing and being rejected. Two weeks ago, America Online (AOL), the largest U.S. Internet company, refused his generous bid of more than its $19 billion market value.

Armstrong had been in broad talks with TCI boss John C. Malone since he took over AT&T, but the discussions only got serious when the AOL bid fell through. The attraction of TCI or any cable system to AT&T was obvious: It could provide the vital local connection since cable companies already have large lines pumping information to subscribers. The big snag: unless upgraded, such lines work just one way, delivering news or movies to viewers but not allowing outbound traffic. To upgrade that system to make it a two-way channel and one that can provide more and better telecommunication services, AT&T could find itself shelling out anything from an additional $2 billion to $10 billion to reach TCI's 33 million existing households, a high admission price to the new telecommunications game.

When they met journalists last week after the deal was announced, Armstrong and Malone were all smiles, as they painted the picture of the perfect deal, and to a certain degree it was. Malone, who was already carrying some $11 billion in debt, badly needed capital to upgrade his outdated cable system. Armstrong got his local service connection to TCI's customers. But Armstrong also sounded like someone determined to get into the game somehow anyway, when he said, "Time was closing in on us. That is pretty motivational to most businessmen."

Where does the AT&T-TCI deal go from here? First stop will be the federal regulators. They poured cold water on the AT&T-SBC merger but this time should be much more accommodating. The earlier deal looked like the first step in an effort to put the old Ma Bell monopoly back together again. This one looks like a move to bring all the pieces of the new telecommunications world together. William E. Kennard, the head of the Federal Communications Commission, which must eventually approve the takeover, last week called the case for the merger "quite compelling."

The AT&T-TCI deal is testimony to the change Armstrong has wrought in just eight months at the infamously hidebound phone company. Under the chairmanship of his predecessor Robert Allen, an aloof, arrogant accountant, AT&T had stumbled from one bad deal to the next. His disastrous foray into computers with the purchase of NCR cost the company $7.4 billion and countless hours of top management's time. Armstrong, who had served as CEO at Hughes Electronics and as a top executive at IBM, knows where he wants to take the company. AT&T is not there yet, by any means. But last week's deal should let AT&T again walk tall among the world's telecommunication giants.