WHEN investment bankers and company chairmen start talking about "mega mergers", wise investors should hold tightly to their wallets. That is the conclusion I draw from observing the maturing of the BTMCI merger.
While most of the industry's commentators have predicted that the acquisition by Britain's dominant phone company of the second largest US long distance carrier will provoke further concentration, there has been remarkably little hard analysis of the business logic.
Yet past waves of mergers have come and gone, lining the pockets of the shareholders of acquired companies but leaving little in the way of synergies for the buyers. The last round of mergers comparable to the changes now afoot in telecoms was the move by Japan's consumer electronics companies into the "software" of the entertainment business. Look where that ended up both Matsushita and Sony were taken to the cleaners in Hollywood.
There ought to be two arguments for merging the operations [of BT and MCI. One is that Concert, the new combined company, will have lower costs than the two companies would have had separately. The other is that it will have higher revenues.
Look first at the cost side. BT has claimed that the combined entity will save money with common software development and shared purchasing starting at £307 million a year, and lower capital expenditure totalling $1.5 billion over five years.
I do not believe these economies will materialise. Both companies are already large enough to exact favourable trading terms from companies they do business with and the British and US markets are already sufficiently different - and the costs of changing legacy systems sufficiently high - to make it unlikely that the same programs will run on computers on both sides of the Atlantic.
There is every reason to believe that two separate cost bases will grow separately for some time. Spaces have apparently been found in the combined hierarchy for almost all the highest paid people in the two firms (the savings will come from the engine room).
The co chairmanship principle will require the company to spend $1 million a year flying half its board across the Atlantic by Concorde every month.
The risk is that the merger might be on the Japanese banking model, where the culture and hostilities of two separate organisations have persisted for years or even decades after they were supposedly merged.
What about revenues? The buzzword of the moment is "one stop shopping": the idea that giant multinationals prefer to have a single company managing their global networks instead of 27 different companies and 27 different invoices. Unfortunately, this process is zero sum - it does no more than redistribute sales from one company to another, and may have the effect of reducing total sales because the new single facilities manager is required to deliver the global service for much less than the previous cost of fragmented dealing.
There is a more important worry, too most customers are not multinationals. The big growth in telecommunications sales is more likely to come from small and medium sized businesses, and for them a phone company that seems to be and local is more attractive than one that is global and powerful.
The biggest opportunity of all is in the residential market, where telephones and the last mile of copper wire he unused for 23/4 hours a day. You do not need to be a global giant to find ways to utilise that capacity better.
Why should BT have been willing to pay twice its own PE (price/earnings per share) ratio for MCI? Two good reasons. One is that incumbents - and MCI is an incumbent, no matter what BT's chief executive Peter Bonfield may say about market entrants - have a big advantage in offering new services. The best example is AT&T's Internet business, which has picked up 500,000 customers in half a year without trying.
Although the EU and everyone else are talking about markets opening, the reality is that nobody is likely to lose money betting against swift telecoms deregulation outside the AngloSaxon world.
Why else would BT be interested in allying itself with NTT, which combines extremely high prices with overstaffing that would make an Indian railway blush? The other good reason for the deal is the hope that MCI's culture gives BT a useful kick up the backside. BT has improved a lot in the past 10 years. It is ahead of its European competitors - particularly the lumbering Mercury Communications in Britain, and the heavily geared monopolists of France and Germany.
But MCI, known by insiders as "More Change Imminent", is faster. Peter Bonfield has already experienced the phenomenon of a smaller company energising a slower moving parent. At ICL, acquired by Fujitsu, he presided over a period in which the British subsidiary effected a reverse takeover of the Japanese parent in managerial terms.
But the worry for BT's shareholders, of whom I am still one, is that the cultural transfer night be in the wrong direction.