U.S. Settles Phone Suit, Drops I.B.M. Case

A.T.&T. to Split Up, Transforming Industry

By Ernest Holsendolph
Special to the New York Times

Washington -- January 8, 1982 -- The American Telephone and Telegraph Company settled the Justice Department's antitrust lawsuit today by agreeing to give up the 22 Bell System companies that provide most of the nation's local telephone service.

On a landmark antitrust day, the Justice Department also dropped its marathon case against the International Business Machines Corporation, a suit that had sought to break up the company that has dominated the computer industry. The Justice Department said the suit was ''without merit and should be dismissed.''

The A.T.& T. agreement, if finally approved by a Federal court, would be the largest and most significant antitrust settlement in decades. It is likely to be compared with the 1911 settlement that divided the Rockefeller family's Standard Oil Company into 33 subsidiaries, some of them huge oil companies in their own right.

Two-Thirds of Total Assets

The heart of the agreement requires A.T.& T. to give up all its wholly owned local telephone subsidiaries, which are worth $80 billion, or two-thirds of the company's total assets. That would radically alter a company that has accounted for more than 80 percent of the nation's telephone service, changing the course of the industry.

But A.T.& T. would be free to enter such previously prohibited fields as data processing, communications between computers and the sale of telephone and computer terminal equipment, all rapidly growing and a profitable aspect of the telecommunications industry. And it would retain its long-distance service.

In divesting itself of local telephone subsidiaries, it would be dropping the least profitable of its operations, accounting for about a third of its $6.9 billion in net income in the last fiscal year.

''A.T.& T. is getting to keep its good businesses and is getting rid of the less attractive operations,'' said Winston E. Himsworth, a telecommunications analyst for Lehman Brothers.

Disclosed at News Conference

The settlement was announced by the Justice Department's Assistant Attorney General in charge of the antitrust division, William F. Baxter, and by Charles L. Brown, chairman and chief executive officer of A.T.& T., at a news conference at the National Press Club.

District Court Judge Harold Greene, who is hearing the case here, announced late today that a hearing would be held at 2 P.M. Tuesday on the motion to drop the proceedings.

Although Mr. Baxter, Mr. Brown and most analysts said the agreement presaged increased competition in the tele-communications industry and ultimately lower prices, there were widespread fears today that, in the short term, local phone rates might rise quickly.

William M. Ellinghaus, president of A.T.&T., said at a news conference that local rates would double in the next few years to make up for the subsidy that long-distance revenues have provided.

A.T.&T. officials added that long-distance rates would be likely to drop once the payment of local service subsidies ended. This would benefit large corporations and other big long-distance users.

Filed in Newark Court

A proposed consent decree, embodying the settlement, was filed in the Federal District Court in Newark, which in 1956 approved a settlement of an earlier Federal suit against the Bell System that confined A.T.& T. to regulated telephone service. Under the new settlement, supervision of the 1956 consent decree would be transferred from Newark to the District Court in Washington, where the seven-year-old antitrust suit was being tried.

''That earlier decree did not anticipate an evolution in modern electronics technology that would in time erase the distinction as between computers and communications,'' Mr. Brown said. ''Yet its provisions have effectively prohibited the Bell System companies from applying the fruits of their own research and development to their own business purposes. The new decree would entirely eliminate such restrictions.''

A critical aspect of the proposed settlement is that it would sever a key source of the giant company's economic and political power, namely the phone companies that blanket nearly every major metropolitan area of the nation and provide a protected market for the parent company's equipment production and facilitated the long distance service.

A number of analysts speculated that A.T.& T. agreed to the huge divestiture because the company feared that Judge Greene, who was expected to rule on the case early this summer, would find the phone company guilty of antitrust law violations an d perhaps force it to give up other subsidiaries as well.

Comment by Judge Greene

When the Justice Department completed the presentation of its case earlier this year, Judge Greene had commented that the department had shown that ''the Bell System has violated the antitrust laws in a number of ways over a lengthy period of time.''

Asked why A.T.& T. agreed to surrender the operating companies, Mr. Brown said, ''We have no stomach at all for a long appellate review.''

Mr. Baxter indicated that in return for giving up the 22 operating companies, A.T.& T. would be free to go into a variety of unregulated businesses without the necessity of running these businesses through a separate subsidiary - sometimes dubbed Baby Bell -that could not be subsidized by telephone revenue.

This was specified in a Federal Communications Commission ruling in 1980 and in legislation now in Congress. Both the agency and Congress were expected to review their actions in light of today's settlement.

'Continue With Our Plan'

Nevertheless, Jay Grossman, an A.T.& T. spokesman, said that even though the consent decree would lift the ban on entering unregulated businesses, the F.C.C. decision still stood because that agency was not governed by a court decree. ''We assume that we will continue with our plan for a separate subsidiary,'' he said, although he added that the F.C.C. might reconsider its decision because the settlement accomplished many of the agency's goals.

A.T.& T. will have six months to file a reorganization plan that specifies how the 22 operating companies -which employ 80 percent of A.T.& T.'s million employees - will be divested. It will retain the Long Lines Department, which operates the nationwide long-distance network; the Western Electric Company, the manufacturing arm, and Bell Laboratories, the research division.

In addition, the agreement will allow A.T.& T. to retain its minority interests in two regional telephone companies: 29.7 percent in Cincinnati Bell Inc. and 21.1 percent in the Southern New England Telephone Company.

Divestiture Options Available

Under the settlement hammered out in bargaining sessions between Mr. Baxter and William Trienens, general counsel of A.T.& T., the company has options available as to how it will divest itself of the operating companies - whether by selling the phone companies to A.T.& T.'s three million shareholders, by combining them into a single large operating company and selling the company as a unit or by selling the subsidiaries individually or in combinations.

Mr. Brown said that A.T.& T.'s shareholders would retain their stock and would also own ''proportionate values'' in the local operating companies after they were divested.

Both Mr. Baxter and Mr. Brown claimed some element of victory in their tentative agreement.

Settlement Termed Good

''I think it is a very good settlement,'' said Mr. Baxter, ''that completely fulfills the objectives that the antitrust division had been pursuing.''

Mr. Brown told some 200 reporters at the news conference that the announcement was ''a historic decision'' and added: ''I believe we have chosen the right course, although clearly it was not the solution that we sought.''

Many key people here who influence national telecommunications policy reacted cautiously to today's dramatic developments. Mark S. Fowler, chairman of the Federal Communications Commission, said: ''The impact upon local and long distance, and indeed the ancillary services provided through our nation's telecommunications system, will require considerable study and we will undertake such a study as soon as we receive the complete details of the agreement.''

The commission has been trying to implement its own restructuring of the telecommunications industry, mostly by keeping A.T.& T. basically intact except for requiring it to form the separate subsidiary for unregulated competitive businesses.

Senator Bob Packwood, an Oregon Republican who is chairman of the Commerce Committee, which crafted the telecommunications bill that passed the Senate last year, said he has misgivings about the settlement.

House Hearings Due Feb. 2

Representative Timothy E. Wirth, a Colorado Democrat who is chairman of the House telecommunications subcommittee, said he would hold hearings starting Feb. 2 on the bill he has drafted for House consideration as well as the settlement.

Mr. Packwood said: ''Long distance used to subsidize and keep local phone rates down. I fear no such accommodation is present in this settlement, and local telephone rates are going to suffer.''

In the revamping proposed today, A.T.& T. would retain ownership of its long-distance lines and even gain control of some long-distance facilities now owned by local phone companies. In retaining ownership of Western Electric, it would have a huge manufacturing arm that supplies about 65 percent of the nation's market for telephones and conventional switching devices and an even larger share of the market in switching equipment.

The phone companies that would be spun off include the following: Bell Telephone of Nevada, Illinois Bell Telephone, Indiana Bell Telephone, Michigan Bell Telephone, New England Bell Telephone and Telegraph, New Jersey Bell Telephone and New York Telephone.

Also, Northwestern Bell Telephone, Pacific Northwest Bell Telephone, South Central Bell Telephone, Southern Bell Telephone and Telegraph, Southwestern Bell Telephone and Bell Telephone of Pennsylvania.

Also, Chesapeake and Potomac Telephone, Chesapeake and Potomac Telephone of Maryland, Chesapeake and Potomac Telephone of Virginia, Chesapeake and Potomac Telephone of West Virginia, Diamond State Telephone, Mountain States Telephone and Telegraph, Ohio Bell Telephone, Pacific Telephone and Telegraph and Wisconsin Telephone.

May Not Own Stock Again

Once A.T.& T. has disposed of its stock in the phone companies, the agreement stipulates that it may not own any such stock again.

A number of forces are thought to have led the Justice Department and A.T.& T. to the bargaining table after seven years of fierce struggle, including a year of trial. A.T.& T. says it has spent $360 million on the case and Mr. Baxter estimated that his department may have spent $1 5 million.

Other agencies of the Administration, especially the Defense Department and the Commerce Department, had wanted to drop the suit, fearing that Judge Greene, who has been trying the case without a jury, might well find the company liable for antitrust abuses and break up the company even more drastically than required by today's agreement.

The judge could have forced the divestiture of even Bell Laboratories and Western Electric. The Defense Department had expressed fears openly that the breakup of the company could jeopardize national security. The original suit, filed in 1974, had sought to break up A.T.& T. on the ground that, in the 1960's and early 1970's, it had thwarted competition in the marketing and manufacturing of phone equipment and the offering of services.

Equal Access Required

The Government held that A.T.& T. placed unwarranted restrictions on the connection of equipment provided by other companies to the Bell System. The new settlement would require the divested operating companies to grant equal access to local lines for all communications companies.

Many of the actual and potential competitors of A.T.& T. are expected to have much to say. For instance, Thomas E. Wheeler, president of the National Cable Television Association, which has always dreaded A.T.&T.'s possible entry into that business, criticized the ''closed-door agreement'' and said that only Congress should be allowed to restructure the industry.

While the tentative settlement had its critics, others welcomed it.

Cost Division Called Vital

William McGowan, the president of MCI Communications, one of A.T.&T.'s earliest competitors in long-distance service, said: ''It sounds damned good for the business, but much depends on how they order Bell to divide up the costs between local and long-distance service for purposes of setting rates.''

He said he was confident MCI could compete strongly with A.T.& T. if, as the settlement provides, it could obtain the same kind of connections to local phone exchanges that the Bell System's Long Lines unit enjoys so that its customers could dial fewer numbers and use both rotary and push-button phones.

MCI customers must now use 21 numbers to reach a long-distance customer, compared to as few as 10 dialed by the Bell System's long distance customers.

Illustrations: photo of William F. Baxter and Charles L. Brown