Back in March, I pointed out that AT&T's (T) acquisition of Bellsouth (BLS)
was no blunder. Potentially delivering $8 billion in new value, the
deal looks good for shareholders. Well, the market agrees. Since then,
AT&T shares have gained 20%, boosting the telecom giant's market
value by more than $20 billion.

AT&T shares have performed well over the past six months, and I expect them to add more value over the coming quarters.

Sure,
horrible competitive conditions and grueling rounds of consolidation
since the great telecom market collapse of 2001 tested shareholders
patience. But I reckon with its biggest deals out of the way, AT&T
will continue to realize synergies and much improved profitability.

By
removing competitors, as AT&T did when it agreed to acquire
Bellsouth this year, the telco has the luxury of cutting costs with
little fear that a competitor will spend more to poach customers.

At
the same time, now that the telecom crowd has shrunk to just a few top
players, pricing conditions are improving for the first time in well
over a decade.

AT&T has also raised its forecasts for full
year profit margins and the amount of saving it expects from the
AT&T-SBC merger.

The company plans to save as much as $900
million this year; at first it had expected savings of $600 million.
Assuming AT&T can keep up its strong integration track record,
investors can hope for more savings from the Bellsouth deal.

Size
matters in the telecom business, and bigger is better. For AT&T,
which generates more than $40 billion in annual sales, an extra
percentage point or two to profit margins can add up very quickly.

Of
course, AT&T and Bellsouth continue to lose hundreds of thousands
of local telephone line customers every month. Many customers are
turning to cheaper alternatives offered by cable providers such as Comcast (CMCSA) and internet players like Vonage (VG).

That
said, many others are signing up for high-speed internet services from
AT&T and for wireless services from AT&T's Cingular business.
For the next several quarters, growth from internet and wireless
services and eventually video, when combined with cost cutting, ought
to offset phone line losses.

The
acquisition of Cingular and the integration of AT&T Wireless put
the new AT&T at the top of the US wireless industry. With roughly
as many subscribers as the 55% Verizon (VZ) – 45% Vodafone (VOD)
joint venture Verizon Wireless, AT&T's 100%-owned wireless business
stands to benefit more from wireless market growth than close rival
Verizon.

Best of all, with a whopping 4.5% dividend yield and
$10 billion buyback program in place, there is little downside share
price risk from here. It's not too late to tuck some AT&T shares
away.

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