"The pension is like a cherry on top of the banana split … It's a very small, but meaningful, contribution to the motivation of SBC, but really this deal is all about cost savings and revenue synergies," said Tom Burnett, president of Merger Insight, an affiliate of Wall Street Access, New York, that provides research and analysis on mergers.
AT&T's pension surplus "certainly is a factor in the economics of the merger," said Ted L. Disabato, chief investment officer of Clark Consulting Inc., Barrington, Ill. "I don't think that anybody is trying to raid the pension fund as a reason to do the deal, but it certainly sweetens the pot..."
But AT&T's pension surplus might dissipate if the estimated 13,000 people expected to leave over the next two or three years all take lump-sum benefits, said Howard Silverblatt, an equities market analyst at Standard & Poor's, New York.
According to SBC's calendar-year 2003 annual report, the company had a pension surplus of $537 million before taking into account its estimated $123 million in potential liabilities for litigation over the a cash-balance plan for union workers in its Connecticut operations. Those employees came from Southern New England Telephone Co., which SBC acquired in 1999, as well as its Atlanta-based affiliate, Cingular Wireless.
Spokesmen for both AT&T and SBC said it is too early to know how SBC will structure the investment management operations of the combined company's pension funds.
One source familiar with the transaction said it's possible that SBC will use its acquisitions of Pacific Telesis Group in 1996 and Ameritech Corp. in 1999 as a template. In both cases, SBC eliminated the acquired company's internal investment operations and moved control of the assets to San Antonio.
And the future of Mr. Angelica, chairman and chief executive officer of AT&T Investment Management, is unclear. Mr. Angelica, 58, oversaw the division of pension assets and investment staff when AT&T was broken up 21 years ago, and some sources suggest he might retire after the merger.
Joint company materials used to discuss the deal with security analysts and the press note that "AT&T headquarters staff will be merged into SBC organizations." AT&T's investment management and pension staff are part of headquarters.
"It would be impossible to speculate … how they would combine the two investment operations, and there is no reason to believe what they did in earlier acquisitions would be a template," said Howard Crane, director of investment consulting for the Americas for Watson Wyatt Investment Consulting, Denver. Watson Wyatt has been advising SBC's pension fund on investment matters for more than a decade.
Mr. Disabato said SBC has expressly pointed to the "synergies" from removing redundancies at the combined firm: "If you think they are going to maintain AT&T's internal investment management, there is a low probability of that."
PacTel's fund had a staff of 13 investment professionals when SBC acquired the Baby Bell in 1996. SBC axed the staff and shut down PacTel's internal investment management operation. SBC shuttered the 26-person, Chicago-based investment operation of Ameritech as well.
As for the money manager lineup at SBC and AT&T, Mr. Crane said it's a good bet the merged entity will combine the investment structures in a single master trust.
According to data submitted for Pensions & Investments' annual survey of the largest U.S. pension funds, AT&T's pension plan had 40.9% of assets in domestic equities, 25.3% in domestic fixed income, 15.9% in international equities, 8.8% in private equity, and 9.1% in real estate as of Sept. 30. There were 36 external managers in addition to AT&T Investment Management.
In contrast, SBC's pension plan had 46.6% of total assets in domestic equities and 30.4% in domestic fixed income as of Sept. 30. But it had the same percentage as AT&T in international equities, much smaller private equity and real estate exposures — 4.5% and 1.9%, respectively — and 0.7% in cash. SBC's pension fund uses 44 money managers; it has no internal investment management operation.
Eight money managers run money for both defined benefit funds: AllianceBernstein Institutional Investment Management; AEW Capital Management; Barclays Global Investors; BlackRock; Capital Guardian Trust Co.; Jennison Associates LLC; Morgan Stanley Investment Management; and Western Asset Management Inc.
Both companies also have 401(k) plans; as of Sept. 30,AT&T's had $8.2 billion in assets and SBC's, $11.2 billion. AT&T has 19 external managers for its defined contribution plan; SBC has two. Both use BGI.
On the cash balance side, SBC recently dropped its cash balance plan for management employees, converting it back to a traditional defined benefit plan design. It retained its cash balance plan for rank-and-file former employees of SNET and Cingular. That plan is subject to collective bargaining.
AT&T has a cash balance plan for management. Steven R. Bruce, the Washington-based lawyer representing participants in that plan in a lawsuit against the company, said it would be reasonable to assume that SBC would also abandon the AT&T management cash balance plan.