Five Reasons Not to Like AT&T Comcast

The proposed merger doesn't look like a step forward for anyone.

So the light shining at the end of Mike Armstrongs tunnel comes from Philadelphia after all. After months of playing boardroom footsie, Armstrong and his crew of mostly aging lions have decided to roll over for the Roberts family, cashing in whats left of their cable chips in the process.

Of course, the final resolution of the proposed merger of AT&T Broadband and Comcast will involve a lot more complexity than that. For one thing, shareholders of AT&T actually will come out with a bigger stake in the combined company -- about 56% of all shares and 66% of voting shares, according to AT&T. The new companys name - AT&T Comcast - reflects that slight imbalance of power.

As with all megamergers, the final value of this get-together is in flux. The one hard number is debt assumption: AT&T Comcast will start its corporate existence with a $20 billion debt dowry from AT&T. Theres another $5 billion in "preferred securities" held by Microsoft, which becomes a minority owner of the new company. The rest of the deal is all stock. The current value of the stock transaction is $47 billion, but that is subject to change.

Executives at AT&T and Comcast are now spinning the positives for the deal. But there are at least five reasons to question exactly what they expect to accomplish beyond temporarily propping up share values.

1. If bigger were better, AT&T Broadband wouldnt be in the shape its now in.

Mike Armstrong thought he was pushing AT&T into the 21st century when he made his "$100 billion bet" on cable starting with the acquisition of TCI and then MediaOne. What AT&T ended up with was a rats nest of systems and technologies that it still hasnt sorted through. Grafting yet more cable systems into this mess is going to slow progress further, and its going to make upgrades even more expensive.

2. The proposed management structure is a potential nightmare.

Comcasts Brian Roberts is the CEO-designate for AT&T Comcast, while Armstrong supposedly will postpone his retirement and stay on as chairman of the new company. The board of directors will consist of five AT&T appointees, five Comcast people and two outsiders. In other words, no one has clear authority coming out of this. History tells us these types of mergers dont start working until one side muscles the other aside. Given the proposed set up at AT&T Comcast, that will take time.

3. $20 billion is a lot of debt to swallow - even for cable companies.

The cable industry is used to carrying a lot of debt, and it is allowed to do so because it has lots of cash flow and decent margins. Those margins are now being threatened on two fronts: rising programming costs and more competition from satellite service providers Echostar and DirecTV. The AT&T and Comcast crews know that advanced services have the potential to offset these threats, which is why talk about broadband data services, interactive TV and telephony is being features so prominently in the justifications for the deal. But getting those services in place is going to take even more investment, which means more debt. You have to wonder how much debt the combined company will be able to sell and carry.

4. Geography is still a challenge.

While a merger of AT&T and Comcast moves closer to Armstrongs original plan to create a cable empire to circumvent the local incumbents nationwide, it falls far short of the kind of ubiquitous coverage required to execute that plan. Back when Armstrong started his cable empire building, he expected to be able to strike deals with other cable operators to develop meaningful telephony services. Those deals didnt happen, and they are no more likely to happen now.

5. Time continues to be a-wastin.

Expect at least a year to pass before the AT&T and Comcast merger gets full regulatory approval. If history is any guide, not much will happen on either side of the fence during that time period. And using history as a guide, it will take another two to three years for AT&T Comcast to sort through all its systems to start getting them in sync. That puts any meaningful push toward advanced services into the 2005-2006 time frame.