01 Feb 1999

Mega mergers and big-time Initial Public Offerings (IPOs) in telecommunications and media littered 1998 and it looks like 1999 is starting off on the same foot.

To recap, among the deals in 1998, Swiss phone concern Swisscom raked in $5.6 billion (£3.4 billion) for its IPO, while NTT's mobile unit DoCoMo raised $18 billion (£10.9 billion). AT&T pledged $36 billion (£21.8 billion) to own the world's largest cable concern Tele-Communications Inc. (TCI); and, MCI and World Com completed their merger making a company with a global telephone and Internet business. Alliances also gathered pace.

Germany's Bertelsmann put Amazon.com on notice by linking up with the world's biggest book retailer Barnes and Noble.

As the new year begins, the push to get bigger continues: Bell Atlantic, Britain's Vodafone and, for a time, MCI-WorldCom all eyed cellular phone giant Airtouch. Vodaphone's - at time of press - proposed bid of $55 billion values the US-based cellular operator at a 50 per cent premium over its stock price in early December and shows how anxious players in the telecoms market are to get their hands on strategic assets. Airtouch is one of the last independent mobile firms left. It counts 7.5 million US customers and 4.9 million international customers.

The mergers are being justified by the CEO mantra of 'building share-holder value' and - even in the face of concern in some quarters of inflated values - the stock market continues to mark up communications companies.

Giant firms are becoming the rule in industries from cars to oil, but moves to create mega communications-media companies are being fuelled by different economics. The merger of Chrysler with Daimler Benz and BP with Amoco both were, to a large extent, defensive: there are too many cars being made too cheaply and oil prices are plunging. But, in telecommunications it is new business that's driving link-ups, much coming from the galloping growth of the Internet.

Technology is playing a big roll and the companies leading the charge are cashing in. In 1998, the Dow Jones US-technology index ended 1998 up 62 per cent compared with the 26.8 per cent increase for the overall Dow Jones US stock index. Microsoft doubled during the year and overtook General Electric Co (GEC) as the world's most valuable company with a stock valuation of $346 billion (£210 billion). Cisco Systems, an Internet plumbing company, saw its stock triple, while Lucent Technologies doubled and saw its market value exceed its former parent AT&T, likely to the chagrin of Bob Allen, the former AT&T CEO who engineered Lucent's spin-off.

The scramble to keep up with the changing face of the media-telecoms business is also making some novel bedfellows. Telecoms equipment company Nortel bought Internet technology company (and Cisco competitor) Bay Networks.

Meanwhile, telephone giant AT&T is snapping up giant cable company TCI.

An indication of how much the market values these combos can be seen in AT&T's decision in early January to ditch plans to create a second so-called 'tracking stock' with the intention of breaking the telecoms giant into a fast-growing, but high-debt residential company (including TCI) and a safer, but slower-growth, business services and infrastructure side. Since the purchase of TCI was announced in June, AT&T's stock has soared, gaining 40 per cent by early January.

It's not just the traditional players anteing up in the telecoms race.

Newcomer Denver-based Qwest is laying fibre in the US fast and penning deals to do the same in Europe with new partner Dutch phone concern KPN.

Companies not usually associated with telecoms or media are also diving in. The electricity business has been a predictable affair, but deregulation and technological advances has enabled power firms (as well as water and gas) to take a look at how the lines they own into consumers' homes and businesses can be leveraged to take them into telecoms. Owning the link to consumers is the key, be it a wired line into a home or business or the service that connects a consumers' wireless devices.

The pot of gold luring companies into this race is huge because it is not just about plain vanilla voice telephone services. It's the Internet, data and interactive services that you can download onto your mobile phone device, etc. But what are the ramifications of the super-communication company for the consumers and shareholders? In the short term, both look good. Shareholders will become enriched as the values of the companies soar. There is a value ceiling somewhere, but the resilienc of Internet-related stocks has market watchers shaking their heads in disbelief. How much higher can a company like Amazon.com go? As Amazon soars the positive glow rubs off: firms like Airtouch are not far from offering fast-Internet access to mobile devices.

Consumers too look to gain, at least in the short-term. Packages of mobile, fixed and interactive TV services will be available. One number for all communications devices. One-stop billing for all telecoms needs. But, in the long run, will the big behemoths drive out competition and innovation?

That's a worry as the drive to merge shows no sign of abating.