Deals Show That GTE Got the Wake-Up Call

In a deal reflecting not only how rapidly business on the Internet is growing but how fast companies must move to catch its bandwagon, GTE Corp. last week offered to buy BBN Corp. for $616 million.

BBN, under its old name Bolt Beranek & Newman, was one of the creators of the Internet, setting up links among university research labs in work for the U.S. government in 1969. Today BBN, based in Cambridge, Mass., provides one of the major Internet networks to business users, allowing companies to set up private links with their customers and suppliers.

That so-called intranet and extranet business is doubling every four months, a pace that makes terrific demands on BBN to expand its facilities. The company had sales of $234 million last year but lost money because it had to spend heavily to keep up with customer demand.

It’s understandable that it would look forward to a merger with capital-rich GTE, the Stamford, Conn.-based regional telephone company that last year had $21 billion in sales, almost $3 billion in net income and roughly $6 billion in cash flow (income plus depreciation).

GTE, in turn, is eager to acquire BBN’s Internet expertise because it faces pressures of its own. The once staid and regulated telephone business, in which GTE serves territories in Texas, California and Florida, is now a free-for-all, opened up for competition by the Telecommunications Act of 1996 and transformed by the convergence of technologies. Computer data transmission will soon surpass voice traffic as telecommunications traffic overall grows to $600 billion a year in the next decade from $250 billion today.

GTE, quick to compete, signed up 1 million long-distance customers in the first year of deregulation. And last week, along with its offer to BBN, GTE agreed to pay $485 million for a 25% interest in a 13,000-mile fiber-optic network being built by QWest Communications Inc. It also agreed to develop joint networking facilities with Cisco Systems Inc.

“We’re going to offer every kind of telecommunications solution to business,” says GTE Chairman Charles Lee, who predicted that company earnings will grow 13% to 15% a year starting in 1998 as sales grow to $38 billion.

But Lee also told securities analysts that the cost of last week’s deals will slow profit growth this year. Investors groaned and clipped roughly 6% off GTE’s stock price.

Yet despite that reaction, GTE has no choice but to make its moves.

“If you don’t arrange your business now for the decade ahead, you’ll get left behind,” says George Conrades, chairman of BBN.

The Internet is growing faster than almost any phenomenon in industrial history, faster than the personal computer a decade ago. One projection by Forrester Research of Cambridge, Mass., sees Internet commerce going from $9.5 billion in revenue in 1996 to $196 billion three years from now.

“GTE’s moves are bold, and that’s good,” says Forrester analyst David Goodtree. “Whether they succeed depends on how well GTE can execute,” he adds. In business as in basketball, execution is key.

In that respect, GTE is a company with a history of doing things differently. It was built in the 1940s and early ‘50s by Donald C. Power, a Columbus, Ohio, lawyer and former public utilities commissioner who was past 50 when he put together local telephone companies in several states to create General Telephone. Later he acquired Sylvania Electronics, and the resulting GTE Sylvania became a major defense and technology company.

It also let its telephone service languish in the 1970s, to the point of apologizing to customers and making efforts to improve service.

Power died in 1979 at age 80. GTE sold Sylvania in the 1980s, but retained an experimental bent. It tried a notable--but not very successful--experiment in interactive television in Cerritos in the 1980s. And it has just launched an interactive TV system over cable channels in Ventura County.

But daring and difference don’t automatically translate into prosperity. Despite fairly good profit growth and a program of stock repurchases, GTE’s share price has risen in only one year out of the last five. Investors saw a mature company running in place that would eventually fall behind.

That’s why Lee, 57, a metallurgical engineer who started out in the steel business before coming to GTE 13 years ago as vice president of finance, decided to take the plunge for growth. He reckoned that phone deregulation and the Internet have changed the competitive outlook. The traditional telecommunications industry is still dominated by AT&T; Corp. and the regional Bells. “But no one has more than 5% of the Internet business,” says Goodtree.

So it’s a wide-open field--although expensive to plow. GTE will invest $4.5 billion a year for the next four years to try to assure itself a place among the big players as the new telecommunications industry takes shape.

The field is so new that many people have only a vague notion of how business is done on the Internet. But it’s a revolution. Electric utilities now swap supplies of electricity over the Internet every minute of the day. Newspapers are being visited for information; the Los Angeles Times Web site gets more than 6 million visits a month.

Online banking is growing exponentially. Wells Fargo & Co. is adding 1,000 Internet customers a day. Net transactions cost roughly 1/40th that of traditional methods. Reductions of that magnitude indicate a historic shift.

And the growth has only just begun. A new survey says that 31 million Americans--12% of the population--now use the Internet for some purpose. User percentages are lower in other countries. Many still find it complex and clumsy but are confident that software improvements will make usage easier.

The future is as predictable as an oncoming locomotive: The Internet will grow. So no matter what your business or job or particular investments, take a fresh look and consider how Internet commerce and practice will affect them. Because you can be sure it will affect them.

GTE decided last week that it would try to get ahead of the locomotive rather than wait to be run over.