News: Analysis & Commentary: BREAKUPS
DIVIDE AND CONQUER?
For 100 years, AT&T believed in one thing above all: That bigger is better. It spent decades buying up local phone companies to create the Bell System and then fought off various government efforts to break up its monopoly. Even when Ma Bell was finally dismantled in 1984, AT&T hung on to its equipment-manufacturing business--despite initial opposition from the Justice Dept. Post-breakup, the company continued its buying spree. Under Chief Executive Robert E. Allen, who took over in 1988, the company pulled off two of the biggest deals in high-tech history--paying $7.4 billion for computer maker NCR Corp. in 1991 and $12.6 billion for cellular-phone operator McCaw Cellular Communications Inc. in 1994.
Then, early this year, Allen changed his mind. With no signs that the massive combination of technology assets would pay off--and with AT&T's stock stuck in the doldrums--Allen concluded that big isn't necessarily good after all, synergy is dead, and the concept of converging communications and computer markets, which drove the NCR deal, is an illusion.
Now, in an effort to untangle itself, AT&T is engineering one of the biggest voluntary restructurings in corporate history. "We reached a time when the advantage of integration was outweighed by the disadvantage of complexity," says Allen.
"GUTSY MOVE." To recover, Allen has moved quickly. In April, he and John D. Zeglis, general counsel, and Chief Financial Officer Richard W. Miller met with investment bankers at Morgan Stanley & Co. and outside lawyers to develop the breakup. The proposal was presented to the board and senior executives in early September during an annual three-day getaway at the Greenbriar resort in West Virginia. Allen says directors agreed to go along with his plan after he promised that he would stay on as CEO of the largest remaining unit through the transition.
On Sept. 20, the company announced the breakup. The surviving AT&T will include the core $53 billion long-distance and cellular-phone businesses. The Network Systems Div.--the former Western Electric, which makes the switching equipment used by local- and long-distance companies--will be spun out to shareholders. Allen says AT&T may sell 15% in a public offering as early as the first quarter of 1996. Global Information Solutions, the loss-plagued former NCR, also will be spun off to shareholders. "This is certainly a very strong and gutsy move on Allen's part," says John A. Haigh, a vice-president with Boston consulting firm Mercer Management.
Indeed, Allen, 60, is being hailed as the conquering hero for his very public about-face. AT&T shares took off immediately on the news and soared by nearly 6 1/8 to close at 63 3/4. In a matter of hours, that added nearly $11 billion in value to the company's market capitalization--more than enough to make up for the purchase of NCR and the ensuing losses. "It allows AT&T to adjust for its NCR acquisition, which has not turned out quite as originally envisioned," says a senior official at Teachers Insurance & Annuity Association-College Retirement Equities Fund, one of AT&T's largest shareholders. "Now, AT&T management can concentrate its energies predominantly on global telecommunications--their area of greatest expertise and potential."
Allen has more in mind than refocusing management, though. More than anything else, AT&T's new structure is meant to capitalize on the soon-to-be-deregulated U.S. telecommunications market. Congress is poised to pass a bill that will allow local phone companies, long-distance carriers, and cable-TV providers into each other's business. Not only will Allen face the seven well-heeled Baby Bell regional phone giants in the long-distance business, but he also risks losing them as customers for AT&T equipment sales. The Bells now account for some 40% of the $23 billion in switches, cable, and other network equipment that AT&T sells.
But the local phone companies, already leery of throwing this lucrative business to AT&T, are loath to continue buying from the company once they move into long-distance and AT&T edges into local calling. "There has always been a cloud in dealing with AT&T," says Robert L. Barada, Pacific Telesis Group's strategy head. "It makes you stop and think when you buy one of their [fiber-optic cable rings], because you know they're installing the same fiber ring in our territory to compete with us. This will take part of that cloud away."
TAG TEAM. Allen concedes that there was a looming problem with the Bells. "These fears and concerns were in part generated by emotions, and they've existed ever since the breakup, but recently they have started affecting our business," he says. How much? Analysts figure that AT&T is losing some $3 billion in orders each year as a result of that fear. Now, Allen says, the equipment sales force is unleashed. "As wild as it might seem, MCI might buy equipment from something that once was the AT&T equipment company," he says.
The breakup could also let AT&T move more effectively into new markets such as information networks. "The unbundling is going to make their strategy on things like the Internet better, not worse, because now they could buy from, say, Sun instead of NCR," says Howard Anderson, president of the Yankee Group, a consulting firm. Competitors like that idea: "Hopefully, AT&T Communications will eventually become a good customer," says Northern Telecom Chief Operating Officer John A. Roth. Allen says that AT&T, the long-distance company, will continue to partner with AT&T, the equipment company. The two, he says, have already agreed to pursue the huge Chinese market together.
Another major benefit, says Allen: uncovering the "buried" value of hot-growth businesses such as cellular calling in a stock that has been dragged down by the money-losing computer business. "Without GIS dragging the stock down, the full value of wireless can be better reflected in the stock price," says a McCaw spokesman. Robert B. Morris III, a Goldman, Sachs & Co. analyst, calculates that the values of the three separate companies, gauged by the multiples of comparable companies--would produce a combined share price in the $64-to-$76 range.
For rivals, AT&T's breakup means years of rethinking strategy. Suddenly, they no longer face a sclerotic, confused mass of conflicting businesses. Instead, they must deal with a highly focused and enormously powerful rival in every telecommunications market. "I'm more fearful for ourselves and the traditional telephone-service providers than ever," says Pactel's Barada. "You're talking about a company that will be totally focused on communication services without the distractions of the equipment business or NCR. They're going to really be coming at us to eat our lunch if they get a chance." That's the idea.
To be more competitive in a deregulated phone business--and to boost its stock price--AT&T will split into three separate entities:
AT&T SERVICES The big enchilada. AT&T holds a commanding 60% of the U.S. long-distance business, the former McCaw Cellular owns the largest U.S. cellular network, and its global expansion makes it the largest international phone company in the world. Now, the unit is poised to enter local service--with the best-known brand name in the business. The company would have to work very hard to turn this business into a dog.
AT&T NETWORK EQUIPMENT The second-largest telecom equipment maker in the world, with hefty 40% operating margins. But deregulation in the U.S. will pit AT&T against the Baby Bells and GTE in long-distance and local calling. By spinning equipment into a separate company, AT&T stands a better chance of keeping its important customers.
AT&T GLOBAL INFORMATION SYSTEMS The problem child. AT&T bought the former NCR for $7.4 billion four years ago, then watched it sink. The unit has lost $3 billion since the merger and is now dropping out of the personal-computer business. It also is in for a major downsizing--8,500 of 43,000 jobs will be eliminated. One potential bright spot: The innovative data-warehousing technology NCR bought from Teradata.
*Estimate DATA: LEHMAN BROTHERSBy Catherine Arnst, with Leah Nathans Spiro, in New York, Peter Burrows in San Francisco, and bureau reports