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January 25, 1998

MICROSOFT TALKS WITH BT PUSH SHARE PRICE TO NEW HIGH

By CBR Staff Writer

The future of British Telecommunications Plc is once again the focus of a storm of controversy and unbridled speculation, based on rumors that Microsoft Corp is in exploratory talks with the UK telecoms giant. The evidence was a flurry of buying on Thursday, which pushed BT’s shares up 4.7% to close at a record high of 583 pence. Could Bill Gates really be considering such a move? In the words of BT’s own chief executive, Sir Peter Bonfield, Nothing in this market surprises me anymore. There appears to be no specific regulatory reason why Microsoft couldn’t launch a bid for BT, but the underlying logic for such a bid is difficult to grasp. The gulf between the two corporate cultures would be difficult to bridge. And as telecoms analysts poured cold water on the idea, the shares cooled, dropping 15 pence to 568 pence. But BT’s lowly share price and cash rich balance sheet (when compared to its US peers) continues to lend support for the idea of a US-led takeover. First on the roster of likely candidates is Bell Atlantic Corp, an acquisitive company with international ambitions. And it would be hard for BT’s board to argue against such a deal, because the underlying transatlantic logic mirrors its own failed bid for MCI Corp. BT’s need to break out of the UK and enter global markets is paramount. But the most plausible rumor doing the rounds, is of a joint venture between BT and Microsoft. Gates has talked in the past about extending Microsoft’s presence into the communications world. But it would be from a direction his company already understands; via computers and high speed, two way data connections. Microsoft is already a communications player, from the data end of the spectrum, holding major stakes in UUNet Technologies Inc, @Home Networks Inc and Comcast Corp; and Gates is also personally involved in the broadband satellite venture Teledesic Corp. But the prospect of Microsoft as a telecoms operator brings up the specter of further regulatory scrutiny for the company, especially from the European Union which is already regulating the cross media shareholdings of national telecoms operators. Gates is pushing the cable companies to get on with standardizing cable modems, and he’s now involved in an initiative to make the Baby Bells standardize Asynchronous Digital Subscriber Line, a technology that gives super fast data rates down existing copper wire (CI No 3,300). The exact shape of this alliance is due to be announced next week, and BT would make a perfect partner. It has held multiple trials of ADSL technology, and is currently attempting to build interactive home entertainment systems. The other compelling argument to favor a joint venture is that Bell Atlantic Corp, the other named suitor for BT, has just announced it will join Microsoft’s ADSL consortium.

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