In a stunning announcement that upsets expectations for the much-ballyhooed information superhighway, cable television giant Tele-Communications Inc. and Bell Atlantic Corp. on Wednesday said they have canceled their $33-billion merger agreement.
The companies blamed the deal's collapse on the Federal Communications Commission, which this week voted to reduce cable television rates against the protests of the cable TV industry. But the complex agreement had run into problems long before the FCC decision.
In the more than four months since the announcement of the deal--which would have been the biggest merger in U.S. history--Bell Atlantic's stock price had plunged more than 20%. The companies also missed three self-imposed deadlines for reaching a definitive merger agreement, as they struggled to overcome a series of complications.
Those included TCI Chief Executive John C. Malone's growing reservations about the deal, according to well-placed sources. Malone, one of the communications industry's most aggressive deal makers, is said to have felt increasingly penned in by the Bell Atlantic marriage.
The failed deal may presage problems for other ambitious, technology-driven alliances. The TCI-Bell Atlantic agreement was hailed as a crucial step in making the information superhighway a reality, since the marriage would have allowed people access to hundreds of cable TV channels and new telecommunications services, such as instant home shopping and banking. Together, TCI and Bell Atlantic would have reached 40% of all households in the United States.
The merger agreement triggered a massive dash among other cable TV operators and regional telephone companies--historically adversaries--to join and create joint ventures in expectation of what is to become the biggest economic boom since the Industrial Revolution. Cox Enterprises and Southwestern Bell have already entered into a joint venture. Others are under way.
The alliance also catapulted the normally remote Malone and Raymond Smith, the ebullient Bell Atlantic chairman, to center stage in the telecommunications revolution. The newlyweds made a habit of appearing together at public events, largely as a public relations move.
Malone, who was to become a major shareholder in Bell Atlantic with stock worth well in excess of $1 billion, was going to play a secondary role in the newly merged company to Smith, who clearly relished the fame the deal brought him.
Bell Atlantic is expected to proceed with its interactive TV experiments, even without TCI. The regional telephone company has been a leader among the Baby Bells in pursuing technology opportunities beyond traditional telephone service.
TCI is widely expected to continue its pursuit of other partnerships. Malone has held discussions with at least three major Hollywood companies--MCA, Sony Pictures and Fox Inc. Malone feels that he needs unrestricted access to programming to feed into his cable systems. The collapse of the Bell Atlantic deal also raises the possibility that Malone will again team with QVC Network Chairman Barry Diller, who recently lost the takeover battle for Paramount Communications Inc. Malone was one of Diller's chief backers before the Bell Atlantic agreement.
Despite all the drama surrounding Wednesday's announcement, TCI and Bell Atlantic left open the possibility they will cooperate on joint ventures in the future, including the building of high-tech cable/telephone systems and investments in programming.
"This deal is so big and under such a microscope you can't simply put it on hold," said one person close to the situation. "If you're going to revisit it, you have to make a clean break."
Regardless of the future for TCI and Bell Atlantic, however, the announcement set the stage for a battle royal with Washington. Some observers speculated late Wednesday that the decision was actually a high-stakes gambit by the two companies to embarrass the Clinton Administration--which has been an enthusiastic proponent of a high-tech cable/telephone infrastructure--and get the FCC to reverse its decision to roll back cable TV rates by 7%.
Malone is notoriously disdainful of politicians and regulators who have tried to rein in the cable industry after years of spiraling rates. TCI vigorously attacked the FCC on Wednesday, saying it would cut its capital expenditure program by $500 million.
Smith said in a statement that the "unsettled regulatory climate made it too difficult for the parties to value the future today." The FCC's action as well as market "uncertainties," added Malone, propelled the two companies to conclude "this is not the time to bring our companies together."
That charge was forcefully rejected by the FCC. Chairman Reed E. Hundt criticized suggestions that the agency's cable rate vote had undercut the TCI-Bell Atlantic deal. He said the price cut "did not in any way make the future of the cable industry more unsettled."