As you doubtless know, AT&T unveiled a complex plan last week to turn itself into three separate companies with four parts sporting a total of six different stocks. What you may not know is that a major motivation was AT&T’s worry that its falling stock price made it vulnerable to a hostile takeover. AT&T insists the breakup is a brilliant plan designed to liberate AT&T’s businesses and reward its shareholders, but even chairman C. Michael Armstrong agrees that the company’s stock tanking to the 20s from its all-time high of $61 in March weighed heavily. “If the sum of the parts and the synergies [among AT&T’s businesses] was in the stock price, we wouldn’t have done this,” Armstrong told NEWSWEEK on Wednesday, the day the plan was unveiled.
The biggest winners in AT&T’s proposed breakup, dubbed Project Grand Slam, are investment bankers, lawyers and other parasites, who stand to reap World Series-class fees. The losers are those who depend on AT&T’s formerly reliable dividend for income. AT&T’s dividend had never been cut since the company started paying it in 1881, a period that includes several financial panics, two world wars and the Great Depression. But the world has changed, and AT&T, which badly needs capital to buy its way into new telecom fields and to expand its current businesses, believes it can’t keep shelling out $3.3 billion of dividends a year. Details of the cut will be forthcoming in December. My bet: AT&T will pay about 40 cents a year rather than the current 88.
The Street reacted by knocking 19 percent off AT&T’s already depressed share price in two days. That decline probably has more to do with the warning AT&T issued Wednesday–it said revenues and profits for the next 15 months will be lower than forecast–than with the breakup and dividend cut. But it shows how far Armstrong’s Street cred has dropped. Back in March, when Wall Street considered Armstrong a visionary genius, news of AT&T’s shuffling stocks around would have sent the stock to the moon. Witness the 25 percent, four-day rise last November, when news leaked that AT&T might issue a “tracking stock” tied to its wireless business. But Armstrong was a hero then; now, he’s a bum.
The restructuring would turn AT&T into three fully independent companies and four separate businesses: AT&T Broadband, which would own AT&T’s cable-TV and fast-growing broadband businesses; AT&T Wireless, a fast-growing outfit that’s a huge cell-phone player, and AT&T Business Services, which would own the famous consumer long-distance business and AT&T’s lucrative business customers. Business Services, which would inherit AT&T’s stock symbol (T, as in Telephone) and its place on the Dow Jones industrial average, would have a separate tracking stock whose results would be tied to the immensely profitable but rapidly waning consumer business. The consumer business, formerly the core of the company, is beset by falling prices. Add two stocks issued by Liberty Media, which AT&T owns but doesn’t control (don’t ask!), and you have six different AT&T stocks. Investors can mix and match. If they can figure out which piece goes where.
This breakup could solve one of AT&T’s biggest problems: squabbling among its businesses for capital and top-level attention. But it’s hard to see how all these businesses will cooperate when they’re independent, as AT&T intends, when they had trouble getting along under the same corporate umbrella.
Last week’s announcement bore some signs of haste. For instance, AT&T isn’t sure yet which parts of the transaction will require stockholder approval. What was the hurry? Undoubtedly the stock price. It’s no consolation to AT&T that rivals such as WorldCom, Sprint, France Telecom and Deutsche Telekom have had price declines similar to AT&T’s. The communications giant needs a high stock price to help Armstrong implement his exciting, bold, risky and oh-so-expensive plan to convert AT&T from a doomed dinosauric long-distance company to a broadband outfit peddling voice, data, wireless, cable TV, Internet access, video and Lord-knows-what-else. Had Armstrong not instituted this plan when he took control of AT&T three years ago, the company would probably have been acquired, or so overmilked its cash-cow businesses they’d be ready for the boneyard. Armstrong planned to use the cash from long distance and money borrowed on AT&T’s then sterling credit rating to finance the wrenching change into a modern company. It’s like rebuilding a railroad while the trains are still running, and having to show Wall Street every five minutes that profits and schedules are all on track. Armstrong couldn’t do it. Maybe nobody could. He was unwilling–or maybe unable–to grit his teeth and soldier on in the hope that the market would come to appreciate AT&T’s value.
A falling stock price has hurt AT&T by damaging employee morale, souring the atmosphere and making it harder to attract or hold high-powered people, much of whose compensation is based on stock options. Then there’s a not-so-obvious problem. AT&T and other telecom companies are going to have to dig deep to bid for wireless licenses the government plans to auction soon. A low stock price and high debt level make it difficult to cut the necessary big checks at spectrum auctions.
Was Armstrong right to ditch his long-term plan and subject the company to its third breakup since 1982 and several years of uncertainty in a fast-moving world? “It’s a foolish thing to do,” says Howard Anderson of The Yankee Group. “I actually think that Mike Armstrong is the best CEO in the carrier business. I think that if you live by Wall Street, you die by Wall Street.” Or take Ken McGee of the Gartner Group, who predicts that AT&T will be kicked out of the Dow industrials: “He succumbed to Wall Street analysts who essentially invaded the boardroom.”
This type of criticism upsets Armstrong, who on Thursday amended his initial remarks to NEWSWEEK. “We think this [breakup] is the right thing to do,” he said. “We would have preferred to do it with our stock at a higher price. That’s not where we are. But that doesn’t change the fact that it’s the right thing to do.”
In fairness, Armstrong would be foolish to totally ignore Wall Street. Lots of corporate chieftains have tried that and ended up unemployed or taken over. But Armstrong has constantly catered to Wall Street. When he announced plans to buy cable giant Tele-Communications Inc., in 1998, he said AT&T would issue all sorts of designer stocks. By the time the deal closed, AT&T’s stock had risen and most of the designer stocks never appeared. Last year, when wireless tracking stocks were hot, he went the wireless tracker route. With that stock down to $22.25 from its initial $29.50, he’s making Wireless an independent company.
Armstrong, to his credit, was attempting something that’s never been successfully done before–transforming a big, old-line company whose once wonderful core business is disappearing. Companies like Xerox, Polaroid and Eastman Kodak have been unable to do so. Companies like IBM, Corning Glass and Ford Motor have retooled themselves, but stayed in the same lines of business.
In a NEWSWEEK interview 18 months ago, Armstrong said the AT&T job called to him. “It’s the ultimate challenge in what I’ve been trained to do: to lead and to change,” he said. What a shame we’ll never find out if he could have done the job.
