A Baby Bell's Growth Formula

SBC seeks Web cachet with its Sterling Commerce deal

You can't blame SBC Communications Inc. for trying to break out of its straitjacket. With SBC stock languishing in the mid-30s, and sales growth in single digits, the San Antonio-based telecommunications giant has been seeking a growth engine with zip. That's why, on Feb. 23, SBC announced a $3.9 billion deal for Sterling Commerce Inc. The business-to-business e-commerce company boasts $561 million in sales and anticipated revenue growth of 20% this year and 27% in 2001.

Chairman and CEO Edward E. Whitacre Jr. is betting that the move into high-margin e-biz services will help convince customers and investors that SBC is more than a fuddy-duddy Baby Bell stuck in slow growing traditional telephone markets. "This opportunity gives us instantaneous leadership in the e-businesss world," declares Richard C. Dietz, president of SBC's Global Markets group. At that, SBC isn't alone. Analysts say that other regional phone companies are also on the prowl for acquisitions that could provide the cachet--and the stock boost--of operating in far sexier e-biz markets.

Still, investors aren't convinced Whitacre made the right move. They see Sterling as a laggard compared with such high-flying e-commerce stocks as Ariba Inc. That's one reason SBC's stock slipped 62 cents to $36 on news of the deal. "It seems like a strange choice," moans Jane A. Snorek, research analyst at Firstar Funds in Milwaukee, which holds SBC stock.

SBC officials play down investor pessimism, suggesting the market doesn't understand the entree Sterling can bring to the business-to-business e-commerce world. That market is expected to grow from $200 billion in 2000 to a robust $2.5 trillion in 2004, says research firm International Data Corp. As telcos wrestle with how to offset eroding revenues in traditional voice services, cyberspace has emerged as an alluring new market, where companies trade as high as 200 times sales. The telephone companies are now scrambling, saying: "`My God, I've got to pump some more volume through these networks,"' says Ford D. Cavallari, executive vice-president of the Internet practice of Renaissance Strategy, a consulting firm.

CROSS-SELLING. The Sterling deal is the latest of several in Whitacre's attempt to remake SBC as an Internet player. He's also investing about $6 billion to offer high-speed Internet service that could reach as many as 1 million subscribers by yearend. SBC and other telcos realize that instead of buying just a pipeline for voice and data, businesses want to buy global systems that enable them to trade with their partners or find new customers. Sterling, which features electronic marketplaces where businesses can buy and sell services live over the Web, allows SBC to offer a broader palette of services. It will also offer SBC access to its customer lineup of nearly 500 multinationals. "They have the opportunity to do some cross-selling," says Guy W. Woodlief, a Prudential Securities Inc. analyst.

If SBC leverages its Sterling acquisition into new customers and higher revenues, other telcos are sure to follow suit. The most likely targets after Sterling are GE Information Services (GEIS) and Harbinger Corp. They offer a full suite of e-commerce services, from transaction software to consulting on building e-communities. BellSouth Corp. may go beyond its venture with Commerce One and buy an e-commerce company, consultants close to BellSouth say. Bell Atlantic and GTE also have had discussions with e-biz companies. "If SBC has any success at all, you'll see more acquisition activity for GEIS and Harbinger," says Cavallari. For the growth-hungry telcos, it looks as if e-commerce has the right ring.

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