2. Procedural Background and Description of Financial Transaction
On February 28, 2005, SBC Communications, Inc. and AT&T Corp. filed a joint application for authorization to transfer control of AT&T Communications of California, TCG Los Angeles, Inc. TCG San Diego, and TCG San Francisco from subsidiaries of AT&T to subsidiaries of the combined organization that will result from AT&T's planned merger with SBC.1 The proposed merger would create the largest telecommunications firm in the United States.
Under the proposal, AT&T would merge into a newly formed wholly-owned subsidiary of SBC, created for the specific purpose of this transaction. AT&T will be the surviving entity of the merger for legal purposes. AT&T shareholders will receive 0.77942 shares of SBC stock for each share of AT&T stock they own, as well as a one-time cash dividend from AT&T of $1.30 per AT&T share. SBC shareholders will continue to own SBC stock and otherwise will not be affected by the transaction. Upon completion of the merger, former AT&T shareholders will hold approximately 16% of SBC's outstanding shares.
The application, as originally filed on February 28, 2005, requested Commission authorization of the transaction pursuant to Pub. Util. Code § 854(a) on an expedited basis with no evidentiary hearings. Applicants did not initially include a showing under § 854(b) of the Public Utilities Code, instead claiming that the transaction is exempt from § 854(b).2 Additionally, although Applicants also believe that § 854(c)3 should not apply, they supplied information in the application that they asserted met the § 854(c) criteria for approval.
SBC's stated purpose in the acquisition of AT&T is to combine the complimentary strengths of the two companies to enable the merged company to compete more effectively in the telecommunications marketplace. The SBC network is nearly ubiquitous where it is the incumbent but virtually nonexistent outside of its ILEC footprint. On the other hand, AT&T's network was initially constructed as a long distance network, and not limited by a need to serve any end points in a local service area. In contrast to SBC's largely local and regional presence, AT&T operates in more than 50 countries, serving the largest global enterprises with a broad array of voice, data and IP-based services. AT&T focuses on enterprise business and government customers through its national and global network.
By combining their respective strengths, Applicants claim that the merger will enable the combined company to become a stronger competitor, and to serve a wider range of customers across all segments of the telecommunications marketplace beyond just the traditional SBC California territory.
AT&T likewise views the merger as an appropriate response to developments that have challenged its competitive stance in certain markets. Among the most significant changes in this regard has been SBC California's entry into the long-distance market. Once SBC California entered the long distance market, it could successfully bundle long distance with local service offerings. SBC thereby strengthened its competitive position compared with that of AT&T. Since receiving authority to offer long distance service, SBC has accumulated in-region market share faster than any other non-ILEC competitor.4 AT&T has been less successful in being able to offer bundled service without the vast local exchange network that its competitor, SBC, possesses. To a great extent, AT&T had relied on the unbundled network element platform (UNE-P) in providing mass market local exchange service and the purchase of special access for other applications. With the elimination of UNE-P as a competitive resource, AT&T stopped marketing local service to new customers. AT&T chose to consider new options, leading ultimately to the merger that is the subject of the application before us.
On March 16, 2005, an Assigned Commissioner's Ruling required supplementation of the application to provide information necessary to comply with all Pub. Util. Code §§ 854(b) and (c) requirements. Although the Assigned Commissioner deferred ruling on the applicability of §§ 854(b) and (c), he required the supplemental filing in the interest of ensuring that any potential disagreement over the statute's applicability not be a cause for delay in adjudicating the application.
On March 30, 2005, the Applicants filed a "Joint Supplemental Application of SBC Communications, Inc. and AT&T Corp." in response to the Assigned Commissioner's Ruling, dated March 16, 2005. Protests to the Application were filed on April 14, 2005, by the following parties: California Association of Competitive Telephone Companies ("CALTEL");5 the Communications Workers of America (CWA)6, AFL-CIO; the Community Technology Foundation of California; Eschelon Telecom, Inc. and Advanced TelCom, Inc.; Level 3 Communications, LLC; Navigator Telecommunications, LLC; the Office of Ratepayer Advocates (ORA) and the National Consumer Law Center; Pac-West Telecom, Inc.; Qwest Communications Corporation; the City and County of San Francisco; Telscape Communications, Inc.; The Utility Reform Network (TURN), Utility Consumers' Action Network, Disability Rights Advocates, Consumers Union of U.S., Inc., the Greenlining Institute, and the Latino Issues Forum; US LEC; WilTel Communications, Inc.; and XO Communications Services, Inc.7
Intervenors claim that the merger, in the form proposed by Applicants, will not assure net benefits to consumers and will adversely affect competition for telecommunications services in California. Certain intervenors categorically oppose the merger under any conditions, claiming that even with certain mitigating conditions, the merger will still be anticompetitive. They argue that SBC already has a dominant share of the market, and that acquisition of AT&T will only further expand its market power by eliminating its largest competitor. Other intervenors do not oppose the merger, as long as certain conditions are adopted to mitigate perceived adverse impacts. Certain parties express concern that the interests of various underserved communities have not been properly addressed. Parties also argue that the proposed Verizon and MCI merger must be also taken into account, as well, in light of its cumulative effect on reducing competition.
Joint Applicants filed a reply in opposition to the protests on March 30, 2005, asserting that the merger is in the public interest, and that there are no adverse competitive effects. A prehearing conference was held on April 20, 2005, and the Assigned Commissioner issued a Scoping Memo by Ruling on April 26, 2005, directing that evidentiary hearings would be held. Applicants served opening testimony on May 6, 2005, and intervenors served reply testimony on June 24, 2005. Applicants served rebuttal testimony on July 8, 2005. Twenty-eight witnesses submitted testimony. ORA and TURN presented 11 witnesses. Seven witnesses were presented by parties representing competitors including CALTEL, Cox, Qwest, Level 3, Telscape, and Pac-West. Other parties presenting witnesses were Latino Issues Forum(LIF); Community Technology Federation of California (CTFC); Disability Rights Advocates (DRA), The Greenlining Institute (Greenlining); and City and County of San Francisco.
Evidentiary hearings were held from August 8-12 and 15-17. Opening briefs were filed on September 9 and reply briefs were filed on September 19, 2005. Concurrently with their opening briefs, a proposed settlement on certain issues was filed and served, jointly sponsored by Applicants, Greenlining and LIF.
The Commission also conducted Public Participation Hearings (PPHs) in Oakland, Sacramento, Fresno, Culver City, Anaheim, Riverside, and San Diego. These hearings were well attended, particularly in Oakland and Culver City. Many representatives from community organizations and some individuals attended the hearings, presenting a variety of views concerning the proposed merger. Both during and subsequent to the PPHs, many additional individuals and representatives of community organizations contacted the Commission with written letters and by electronic mail expressing their views on the proposed merger. We have reviewed and taken into account, as appropriate, the comments presented by members of the public, both at the PPHs and through subsequent cards, letters, and electronic mailings to the Commission. We wish to express our appreciation to all of the individuals who took the time to attend the PPHs or to otherwise communicate their comments.
1 Unless otherwise noted, subsequent references herein to AT&T California include, by reference these TCG affiliates.
2 Section 854(b) requires the Commission to find that the proposed change in control provides short-and long-term benefits to customers (§ 854(b)(1), equitably allocate forecasted short-and long-term economic benefits where the Commission has ratemaking authority (§ 854(b)(2), and determine that the change in control does not adversely affect competition (§ 854(b)(3)).
3 Section 854(c) requires the Commission to apply eight criteria in its evaluation of whether a transaction is in the public interest.
4 Ex.109, Sumpter Testimony (Pac-West) at 11-12.
5 CALTEL filed its protest on behalf of its member companies.
6 CWA formally withdrew its protest on June 14, 2005.
7 The following parties subsequently withdrew their protests as follows: WilTel on June 18, 2005; US LEC on June 21, 2005; Eschelon Telecom and Advanced TelCom on June 24, 2005; and XO on June 24, 2005.
