WIRED!

• Share

The largest communications deal in American history might never have come to pass last week if Bell Atlantic chairman Raymond Smith and Tele-Communications Inc. president and chief executive officer John Malone had not got stuck on a boat off the coast of Maine. The merger talks were going nowhere that August afternoon when the two men decided to head back to shore, only to find that the anchor of Malone's 70-ft. sailboat had snagged an underwater power line. While divers spent two hours cutting the boat free, Smith and Malone had little choice but to continue trying to unsnarl the deal. ''We were lucky we weren't electrocuted,'' says Smith, who carries a blue poker chip in his pocket to remind him to pay attention to blue-chip opportunities. ''But it gave us a chance to keep negotiating and to come up with some good ideas.'' Those notions led to a breathtaking combination that calls for Philadelphia- based Bell Atlantic to acquire Englewood, Colorado-based TCI, the world's largest operator of cable-television systems, in a stock transaction valued at $21.4 billion. (Bell Atlantic said the figure included $11.8 billion of stock that it plans to issue and the assumption of $9.6 million of TCI debt.) That would make the deal second in size only to the $25 billion purchase of RJR Nabisco by buyout barons Kohlberg Kravis Roberts in 1988. The new giant would boast 28 million cable and phone customers across the U.S. and combined revenues of more than $16 billion, making it by far the largest of the seven Baby Bell companies that were spun off from AT&T in 1984. Most important, the merger would hasten the arrival of what has been called the ''electronic superhighway,'' a widely heralded (and sometimes wildly hyped) system that will soon deliver to American homes everything from video games and movies on demand to vast video shopping malls. By adding high-speed switches to the cable wires that serve TCI's 10.7 million customers, Bell Atlantic would enable the subscribers to choose from hundreds of channels with the click of a remote-control button -- and be billed for the time they spend before the TV exactly as if they were making telephone calls. Bell Atlantic could also provide phone service -- even video phone service -- over TCI's ubiquitous cable wires, and thereby invade the territories of other Baby Bells from coast to coast. ''What we're seeing is the total redefinition of the communications industry,'' says Ken McGee, who studies such trends for the Gartner Group consulting firm. The deal triggered a speculative frenzy on Wall Street, where every phone company suddenly seemed to be on the make and every cable operator looked sweetly enticing. The big gainers among cable stocks included Cablevision Systems, which jumped 9 1/4 to 63 5/8 in a single day, and Comcast Class A shares, which rose 6 3/8 to 39 5/8. The two industries had already begun to mate: faced with the crumbling of their local telephone monopolies, the cash- rich Baby Bells had been making love, not war, with their cable-TV rivals. Just last week Atlanta-based Bell South agreed to pay $250 million for a 22.5% stake in Prime Management, a Las Vegas cable company. In May, U.S. West put up $2.5 billion for a 25% share of Time Warner Entertainment, a unit of Time Warner that owns, among other things, cable outlets in 36 states. Southwestern Bell spent $650 million in February for just two suburban cable systems in Washington. The Bell Atlantic-TCI deal dwarfed the bidding war between Barry Diller's QVC shopping network and MTV-owner Viacom for Paramount Communications, which had held Hollywood and Wall Street spellbound in recent weeks. It also thickened the plot, since TCI-controlled Liberty Media has been a chief backer of Diller's, whose nearly $10 billion bid for Paramount tops Viacom's by about $2 billion. While Malone stressed his continued support for Diller, he described the Paramount brawl as ''very peripheral'' to TCI's main concerns. Asserting that ''we wish Barry well,'' Malone called Diller ''the only person on earth who can make Paramount worth what is being bid for it.'' The proposed Bell Atlantic-TCI marriage will face months of scrutiny from armies of Washington regulators, Justice Department attorneys and state and local agencies. The key question: whether the nuptials would violate antitrust standards. While the deliberations will probably last until the middle of next year, the deal came under immediate fire from Howard Metzenbaum, the Ohio Democrat who chairs the antitrust panel of the Senate Judiciary Committee. Metzenbaum vowed to hold hearings and denounced the proposed combination as a ''megamonster'' that could overcharge consumers. Perhaps the biggest question of all last week was why the tough-as-nails Malone, 52, long regarded as the undisputed king of cable, would agree to sell TCI and assume the lesser role of vice chairman -- to Smith's chairman and chief executive officer -- in the new company. Malone had loomed as the * potential big winner of the Paramount fight, the master strategist who would run lucrative Paramount movies and TV shows on his cable systems and thereby tighten his grip on the industry. While that could still happen, the image of Malone as anyone's No. 2 seemed strange. He will certainly be well rewarded for selling out to Bell Atlantic. His TCI and Liberty holdings would be worth about $1 billion in the merged company's stock, making the taciturn Connecticut Yankee one of the richest men in the country. With Smith as the front man, the deal distances Malone from some of his fiercest critics. He had become increasingly fed up with politicians and competitors who accused him of building his empire through ruthless, anticompetitive practices. (As a Senator, Vice President Al Gore was quoted comparing Malone to Darth Vader.) But Malone's chief reason for merging may have been the simple realization that Bell Atlantic has the financial clout to help him build his cherished superhighway. For all of TCI's vaunted size, a fellow cable operator noted before the deal, ''John's still not half as big as any of the regional Bell companies.'' So deep are Bell Atlantic's pockets that it announced a $1.04 billion investment in Grupo Iusacell, a Mexican cellular- phone company, the day before unveiling its plans to buy TCI. Yet the deal raised serious doubts about whether the imperious Malone could peacefully coexist with the studious Smith. ''The U.S. Army wasn't big enough for Generals Patton and Bradley,'' notes Ronald Altman, who watches the communications industry for the firm Furman Selz. ''The question is, will Bell Atlantic be big enough for both Smith and Malone?'' Others speculated that Malone would soon be running the company. But Smith, 55, hardly seemed worried. ''John has expressed his interest in a very forthright way,'' Smith told TIME. ''He is interested in pursuing programming and multimedia opportunities. He will be free to roam and find new deals.