Comcast to buy AT&T Broadband By David Lieberman, USA TODAY NEW YORK  It's over. Comcast won. After a six-month fight, AT&T directors voted unanimously late Wednesday to merge their No. 1 cable company, AT&T Broadband, with the No. 3 operator. They'll create a new giant, AT&T Comcast, that would have $19 billion in annual revenue and 22.8 million subscribers clustered in major markets, including Philadelphia, Detroit, Boston, Chicago and San Francisco. They'll run an operation with Comcast, which also controls QVC, E Entertainment Television, the Golf Channel, and some regional sports services. Read more From our archive AT&T mulls offers for broadband unit

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Search USA TODAY for earlier stories on this subject The stock deal values AT&T Broadband at $52 billion. In addition, AT&T Comcast will take over $20 billion in AT&T debt. It is a defining moment for the cable industry, and it promises broad impact for cable consumers. Among other things, AT&T Comcast vows to accelerate its deployment of competitive local phone services via its cable lines. The deal also virtually ensures that the remaining pieces of AT&T  a company whose name used to be synonymous with phone service  will be split up and sold. When the cable deal closes, CEO C. Michael Armstrong will move to AT&T Comcast, where he'll be chairman. "AT&T Broadband and Comcast can accomplish more together than we could alone," Armstrong said in a statement. But Comcast President Brian Roberts will be CEO, and effectively in charge. His family will own about a third of the voting shares. Comcast's last-minute agreement to let Armstrong chair the merged company appeared to have put its bid over the goal line Wednesday night. Comcast also accommodated AT&T by embracing phone services. Up to now, Comcast has said that it wanted to wait for new technologies using Internet standards that might enable it to offer phone service without the expense of buying circuit switches. "The size of our telephony footprint, combined with AT&T's expertise and leadership in the telephony space, will enable us to accelerate the deployment of telephone services to many new markets," Roberts said in the release. Consumer advocates are wary about the arrangement. The new company will reach 34% of all cable and satellite subscribers, higher than the Federal Communications Commission's limit of 30% (which is currently being challenge in court). "A combination of that size will have the ability to determine who makes it in programming," says Consumers Union's Gene Kimmelman. He will ask the FCC to require AT&T Comcast to sell systems to bring its reach down to 30%. AT&T's Armstrong had hoped to restore the clout of the fading long-distance giant after 1997 when he became CEO. He spent close to $100 billion buying Tele-Communications and MediaOne in the hope that these cable companies would provide a platform to build a nationwide AT&T-branded local phone service. That dream died in 1998 when other operators refused to go along with his plan. Comcast put AT&T Broadband in play in July with an unsolicited stock offer, then valued at $44.5 billion. AT&T quickly rejected it, saying that the offer  which came to about $4,100 per subscriber  was too low. But that bid got things rolling. Under pressure from investors, who had seen AT&T's stock price plummet 70% since March 2000, Armstrong tried to win higher offers from other companies and financial backing to keep the cable unit with AT&T. In the end, the board had merger proposals from Comcast, AOL Time Warner and Cox, and was talking to Microsoft about a possible investment. At midday Wednesday, directors were said to have soured on AOL's plan to blend its 12.7 million subscribers with AT&T's 14.4 million customers. They feared that a merger of the two biggest cable companies would not survive federal antitrust scrutiny. The Cox offer was complicated by the company's ownership of TV stations in markets where AT&T has cable systems, including Atlanta and Seattle. Federal rules prohibit a company from owning a TV station and cable system in the same community. And prospects for AT&T to keep its systems independent faded after Microsoft placed new conditions on a possible investment, estimated at about $3 billion, in the operation. It wanted AT&T to offer Microsoft's MSN Internet service on all of the company's high-speed cable lines. That's on top of an earlier requirement that AT&T use Microsoft software to operate its interactive TV decoder boxes. To keep the deal tax-free for AT&T, its investors will own more than a majority of the shares  56% of the equity and 66% of the votes. The board will have five members from AT&T, five from Comcast, and two new members picked jointly by the companies. For more than a year AT&T executives have tried to convince Wall Street that there's a compelling reason for them to hang onto their cable business. But it has been a tough sell. Although cable has a brighter future than AT&T's core long-distance business, it isn't clear how the systems fit into an overall strategy. AT&T stayed out of the programming business. So unlike AOL Time Warner, Comcast, and Cablevision Systems, it can't claim the most common synergy  using the distributionlines to promote channels. Armstrong initially had a much bolder idea with his plan for the nationwide, cable-based local phone business. Lately Armstrong has said that cable is attractive enough by itself. Although the core business  retransmitting TV channels  is mature, he argued that the billions he spent to buy TCI and MediaOne and upgrade their systems to handle two-way communications would put AT&T Broadband into the forefront of the convergence revolution. He saw consumers willing to rush to buy lucrative new services led by digital cable, high-speed Internet connections, and phone hookups. And AT&T was well-positioned to ride the wave. Its 14.4 million subscribers are concentrated in 12 of the 25 biggest markets, including the corridor from Boston to Hartford, Conn.; the San Francisco Bay area; Chicago; Seattle; Miami; Denver; Dallas; and Atlanta. With 1 million local phone customers, AT&T has far more than any other cable company. But even investors who accepted Armstrong's long-term vision questioned how fast it would materialize  and whether AT&T had the management skills to make it pay off sooner rather than later. They grew nervous as the company, which had borrowed heavily to become a cable power, struggled to pare expenses and integrate the systems. Many feared that AT&T was thinking like a phone provider instead of a cable operator. AT&T and Cox are the only cable companies that have invested heavily in the circuit-switches needed to offer phone services via cable. Most other operators are waiting for engineers to perfect the potentially less expensive technology that routes calls using Internet-like digital packets instead of switches. Meanwhile AT&T Broadband's expenses took a toll on earnings. Only about $8.47 of each subscriber's monthly payment early this year found its way into cash flow. That put AT&T far behind its peers. AOL Time Warner, Comcast and Cablevision Systems each collected more than $20 a month in cash flow, and other operators were close behind. Investors grew impatient as AT&T shares plummeted. Hoping to focus investor attention on cable's potential, and away from AT&T's long-distance woes, Armstrong made plans to offer a tracking stock for its cable business. That set the stage for Comcast's startling announcement in July that it would offer $44.5 billion in stock for AT&T Broadband. "The vision of a converged communications company really is not something that's been proven to work," says Forrester Research analyst Josh Bernoff. "That was Mike Armstrong's vision." Contributing: Andrew Backover