The Day Ahead: AT&T's spin doesn't ring true

Treating your shareholders like idiots isn't always the best plan
Written by Larry Dignan, Contributor on

Commentary: Amid all the whining about AT&T's slow motion breakup plan and complaints about how Ma Bell's $100bn cable binge hasn't paid off, there's one item that should irk you more than anything -- AT&T thinks its shareholders are stupid.

There's really no other way around it. Chairman C Michael Armstrong spun himself silly Thursday on a conference call with analysts. Armstrong made it sound like AT&T's plan all along was to integrate broadband, cable, wireless and long distance, build the businesses up so they were suitable for investors and then set them free as independent companies or tracking stocks.

Yeah right. Armstrong certainly didn't give any hints of a future breakup back in 1998 when the company bought John Malone's tracking stock happy cable company TCI. Back in 1998, it was about conquering the last mile to the home and bundling communications services. Two years later, it's clear AT&T can't make it all work -- consumers aren't hip to one bill and connecting the parts of the network isn't easy.

So now the plan, which will be complete in 2002, is to break AT&T into four interconnected companies -- wireless, consumer, broadband and business services -- to enhance shareholder value. Armstrong's pitch was "we meant to do this all along", but it's disingenuous. The company, which posted lower-than-expected sales growth in some of the units to be spun off, will use proceeds from its breakup to pay down $61bn in debt from AT&T's acquisition binge. It's a spin-off plan pulled from John Malone's shareholder value playbook.

Of course, Armstrong rejected suggestions that the breakup is a reversal of AT&T's earlier strategy. "I find that not only wrong but offensive," he said, referring to the view that AT&T is reversing course. Armstrong said that the current plan had always been the strategy, and that the company had only now reached the point at which splitting up the businesses made fiscal sense.

"The first phase was getting all that straight. The second phase was accumulating [the assets we needed]. The third phase was to build on those businesses, operationalise them. We've been doing that," he said. "Now is the time to realise the value creation phase of that strategy."

Here's what Armstrong should have said. When AT&T bought TCI and other cable assets, the idea was to connect the last mile and bundle services. This investment was contingent the success of AT&T's long distance business, which was deteriorating. The long distance business is unraveling faster than expected and hurting earnings. Meanwhile, the investment needed to execute AT&T's convergence strategy is huge. Given the current state of affairs, AT&T is better off split into parts so each business can move forward.

That line would have simple, straightforward and accurate. You should note the difference in tone between AT&T and Xerox. Xerox will be spinning off and selling assets because it needs the cash. The company is upfront about it. With AT&T, we get revisionist history.

Despite all the spin and yapping about how the breakup "comes from a position of strength", this split-up can work. This breakup plan would have had a much better reception without the excessive spinning, not to mention weak third quarter results.

For starters, officials said the synergies could be better because of the break up. Synergies and bundling agreements between the four baby AT&Ts will be more business-like. There will be legit contracts and performance goals, execs said. In many huge companies, it's easy to work with outsiders than it is to work with another division under the same roof.

Meanwhile, investors can pick and choose what they want to buy. AT&T is not your grandma's dividend-producing stock any more. Does granny want a cable company? Instead, AT&T will spin off its long distance business as a tracking stock. We're not hip to tracking stocks, but the idea isn't totally whacked. AT&T Wireless, now a tracking stock, will be completely independent.

The worst case scenario is that you'll just hold a bunch of stocks that add up to the current value of AT&T. Some analysts speculate AT&T is worth $40 a share, considering the underlying assets. To see how this all turns out, however, will take time. AT&T won't spin off everything until 2002, given good market conditions.

When eMerge Interactive, a B2B cattle auctioneer, went public I couldn't resist the bad cow puns. I suffer from an affliction called bad-pun-itis from time to time.

An online cattle auctioneer? I got quite a chuckle from the heady valuation eMerge received too.

But let's give the company its due. eMerge met estimates for its third quarter with a loss of 13 cents a share, and reported sales of $277m, up from $160m in the second quarter and $16m a year ago.

Scoff at the idea of B2B beef, but it's kinda hard to argue with that sales growth. The company is on the path to profits and is moving a lot of cattle. Cattle sold by eMerge rose to 632,800 head, an increase of 85 percent from the 342,500 head in the second quarter.

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