The more I look at the preliminary version of the breakup plan that AT&T has filed with the Securities & Exchange Commission, the more convinced I become that if I owned AT&T stock, I’d vote no. AT&T says the breakup will liberate each business, eliminate internal conflicts over capital and end squabbles over the prices AT&T’s disparate parts charge each other. In short, it will be the greatest thing since Alexander Graham Bell invented the telephone in the 19th century. The pitch to stockholders is that owning four pieces of paper–Wireless (which it will soon distribute), Broadband, Business and Consumer–will yield a higher total value than owning AT&T Classic. But I think the breakup is a cop-out by the company’s management and board, which launched a bold plan to convert AT&T into a “broadband” company from a long-distance company, spending more than $100 billion to buy cable-TV companies and other properties, only to lose its nerve when the stock tanked. The breakup will go through, if only because Wall Street is salivating over the prospect of hundreds of millions in fees for peddling all these pieces. AT&T is bending to the market’s will, a major mistake.
The company’s 4.8 million shareholders will probably end up with four stocks in place of their current AT&T Classic. Then again, they may get to pick and choose. It’s not clear where–if anywhere–chairman C. Michael Armstrong will end up. The only way to know for sure whether the plan will succeed is to have a functioning crystal ball–but they’re in short supply. A way to take a guess is to look at AT&T’s SEC filings about each piece, try to value them and figure out how many shares of each piece an AT&T Classic stock represents. But you can’t do that from the preliminary filing. Among other things, AT&T doesn’t yet know how many Wireless shares it will distribute to its current shareholders or how many Broadband or Consumer shares it will sell to investors rather than distribute to shareholders. Also, while we know how much debt each piece had at the end of last year, the debt is much lower now.
Even valuing the most understandable piece of AT&T–the immensely lucrative but quickly fading consumer long-distance business–isn’t easy. That’s because AT&T Consumer plans to offer people high-speed DSL–digital subscriber line–video, Internet and data services over phone lines. How much will that cost? Will AT&T manage to create the country’s first successful big DSL operation? Who can say? (As an aside, it’s entirely possible that you’ll get hustled by AT&T Broadband to do your Internetting over cable-TV wires and also get hustled by AT&T Consumer to do it over a DSL line. Won’t that be fun?) And Business may turn out to be better than it looks now. Even though its long-distance revenues continue falling off a cliff, its data business is rising rapidly, and will soon be more than half the company’s revenues.
I think the decline in AT&T’s long-distance business shows how right Armstrong was in 1998 when he decided long distance was doomed, and bet the company on offering broadband services over cable-TV wires. AT&T has had some setbacks, to be sure. It needed cable properties so badly that cable magnates like John Malone played it like a violin. Malone will soon sail off into the sunset with his Liberty Media, carrying $650 million AT&T wouldn’t have had to pay had it managed to keep Liberty a subsidiary. And AT&T got outfoxed by Comcast and Cox Cable, having to pay them $3.2 billion (in AT&T stock) for giving up their right to get $2.9 billion from AT&T for their stake in Excite@Home, a partly owned AT&T affiliate. AT&T paid extra and let them keep the shares, worth around $300 million, to get a $1.2 billion tax break. But what an expensive embarrassment.
I think AT&T would be better off sticking together, because it would not only save tons of reorganization costs, it would also avoid the breakup trauma the Baby AT&Ts will go through. It’s not easy changing from being part of a big company to being independent–AT&T itself has never really adapted to its two previous breakups. And in today’s telecom world you don’t have years to adapt. You have minutes, if that.
Even with the better information AT&T will distribute someday, deciding which parts (if any) you want to own will be tough. If I had my druthers, I’d sure take the corporate printing contract.
