A Sticking-to-Their-Knitting Deal;Nynex and Bell Atlantic Decide They Are Truly Made for Each Other

It may be less New Age this time, but it may make better business sense.

Three years ago, when Bell Atlantic's chairman, Raymond W. Smith, was planning a huge communications deal, he held a decisive meeting with John C. Malone, the chief executive of Tele-Communications Inc. aboard Mr. Malone's yacht off Maine.

There, the two executives passed a languid afternoon, musing about how the merger of their companies could revolutionize the world of information and entertainment. To the chagrin of both men, the $21.4 billion deal they announced a short time later unraveled over a pricing disagreements and regulatory uncertainties.

This time around, when Mr. Smith decided to merge Bell Atlantic with Nynex, the utopian gave way to the utilitarian. He conducted a crucial meeting last October with Nynex's chairman, Ivan G. Seidenberg, in a conference room at Philadelphia International Airport. There, the two dispensed with formalities and set straight to work sketching an organization chart for the combined companies.

Yesterday, after Bell Atlantic and Nynex announced they would merge in a deal valued at $22.1 billion, Mr. Smith said he was now glad that the TCI pact foundered.

For Bell Atlantic, analysts say, this marriage has a better chance for success than the TCI tryst, because Congress has removed most of the regulatory confusion, and the new competitive environment appears to encourage phone and cable companies to stick to their knitting.

The Government's recent overhaul of communications law permits the Baby Bells to expand into long-distance, while allowing long-distance carriers like AT&T and MCI to expand into local service. Because long-distance is such a vast opportunity, analysts said it had cooled the ardor of phone companies for the television business.

"If the telecom act had passed five years ago, we probably would have been talking to Nynex instead of TCI," Mr. Smith said yesterday in an interview after he and Mr. Seidenberg announced the merger.

For consumers, this deal may actually make life simpler. By teaming up, Bell Atlantic and Nynex will be able to offer local, long-distance and cellular phone service in a uniform package throughout the Northeast. If Bell Atlantic had gone through with the TCI merger, consumers would have faced the bewildering prospect of a phone company offering cable service -- or a cable company hawking phone service.

One can measure the legislation's profound effect just by tracking the types of communications deals that have occurred since Bell Atlantic announced its merger with TCI in 1993. What started as a flurry of alliances between cable and telephone companies has more recently shifted toward a series of deals between companies in similar businesses.

Earlier this month, two other Baby Bells -- SBC Communications and Pacific Telesis -- announced that they would merge. And last fall, Time Warner, whose holdings include the nation's second-largest collection of cable systems and the HBO cable channel, said it would acquire another cable programmer, Turner Broadcasting System. In May 1993, Time Warner had become the first cable company to ally with a phone company, striking a $2.5 billion deal with U S West -- a troubled alliance that now finds the partners fighting each other in Delaware Chancery Court.

Even without his own cable alliance, Mr. Smith said he was still determined to become a player in television. But he and Mr. Seidenberg both were far more interested yesterday in talking about the $20 billion worth of long-distance telephone calls originating each year in the 12 Eastern states from Maine to Virginia that the new company would serve.

Mr. Seidenberg said the new company, which will be based in New York and called Bell Atlantic, would begin competing in the long-distance market as soon as this fall. Analysts said the new Bell Atlantic stood an excellent chance of grabbing nearly half of those calls.

"The reason that long-distance carries the day over television is that it is just so easy," said William C. Bane, a telecommunications consultant at Merger Management Consulting in Washington. "The problem with them getting into cable TV is that they don't have the plant," he added, referring to the miles of high-capacity cable typically required for video networks.

The telecommunications legislation has steered the Bell companies away from the cable industry for another reason. By allowing them to offer an array of services in their own regions, the bill has obviated the need for Bell Atlantic or Nynex to acquire companies in different parts of the country as a way to expand beyond the local phone business.

"What we're doing is building from what we have -- not running around trying to get things from other people," Mr. Seidenberg said.

To be sure, Bell Atlantic and Nynex are upgrading their networks to carry video services. Along with Pacific Telesis, the two companies are partners in a television programming venture, Tele-TV, which plans to begin offering service in November using wireless cable technology that would offer fewer channels than most regular cable systems.

But since the companies struck the Tele-TV partnership last year, they have all become distracted by other opportunities. Tele-TV has languished as its target date for beginning service has been moved back several times. Executives at the venture said they were frustrated at having plowed $100 million into technology and programming without signing up a single viewer.

Senior executives of Bell Atlantic said they were sympathetic, but that the Nynex merger and other matters took precedence.

"Their single goal is to get up and running," said James G. Cullen, a vice chairman of Bell Atlantic who will be chief executive of the new company's consumer businesses. "But we have several other goals."

Technology has also played a part in keeping both telephone and cable companies focused on their own businesses. Mr. Smith said that Tele-TV's slow start was partly a result of delays in developing a converter box that would allow phone companies to deliver video signals. "I'm as frustrated as they are that the technology has been delayed," he said.

And in any case, technological overhauls can be prohibitively expensive. Cable companies have learned that lesson as they have tried to upgrade their coaxial networks to carry telephone calls. After TCI's deal with Bell Atlantic fell apart, TCI struck an alliance with two other cable operators and Sprint to offer a nationwide package of cable and phone service.

But Mr. Malone said in an interview that the partners decided to scale back the wired telephone part of the alliance. And he said that TCI and the other cable companies -- Cox Communications and Comcast -- had begun to doubt that the phone business made economic sense in all its systems.

Time Warner, meanwhile, is doggedly upgrading its cable systems for telephone service. But the company is facing stiff competition from incumbent local phone companies and rivals like AT&T. In Rochester, Time Warner's flagship market for phone service, it still has only 1,000 residential customers.

And of course, one of the seven Baby Bells, U S West, has continued to pursue an aggressive cable strategy. In addition to its alliance with Time Warner, U S West in February agreed to acquire the nation's third-largest cable operator, Continental Cablevision, for $5.4 billion.

But telephone executives said that U S West was different from its Bell brethren in one critical respect. Unlike Bell Atlantic and Nynex's populous East Coast stronghold, U S West's Rocky Mountain region is sprawling, sparsely populated -- making it difficult to capitalize on the long-distance and wireless opportunities that Bell Atlantic and Nynex have within their own territories.

Cable companies have suffered under the weight of technological hurdles that are imposing enormous construction costs at a time when the financial markets are making it difficult for the debt-laden cable operators to borrow money.

When Bell Atlantic struck its deal with TCI in 1993, the company agreed to pay $34 a share for the stock of TCI and its programming arm, Liberty Media. Yesterday, shares of TCI and Liberty closed at a combined value of $26.46. And Mr. Malone recently had to reassure Wall Street that he had not lost his pioneering touch.

For telephone companies, by contrast, the biggest issue is not debt but cost-cutting. Indeed, one of the most controversial facets of the Bell Atlantic-Nynex merger may be the prospect of paring the combined companies' payrolls. But while the Communications Workers of America has vowed to fight the merger, the companies said yesterday that they would cut only 3,000 nonunion positions out of a combined total of 133,000 employees.

As for his own job, as chairman of the merged companies, Mr. Smith has agreed to relinquish it to Mr. Seidenberg after two years. But Mr. Smith did secure the right to call this new behemoth Bell Atlantic.

Bell Atlantic shareholders would also wind up owning more than half the new company, once the merger was completed -- something expected to take 12 months. Under the terms of the deal, the new company will issue stock to shareholders at a ratio of one share for every share of Nynex, and 1.3 shares for every share of Bell Atlantic.

In trading yesterday, Bell Atlantic's shares rose $2.25, to $67.25, while shares of Nynex slipped $2.50, to $50.50.

Despite all that has transpired since that 1993 meeting on Mr. Malone's yacht, Mr. Smith looked the picture of calm yesterday as he presided over yet another jam-packed news conference to announce yet another blockbuster deal. With Nynex's $13.4 billion in revenues and lucrative home market in his grasp, he probably no longer has to fear the prospect of squaring off against Mr. Malone or the rest of the cable industry.

As Mr. Smith himself said, "I don't stay up nights worrying about it -- at all."