AT&T; Should Consider Its Own in NCR Bid
American Telephone & Telegraph’s $6-billion takeover proposal to computer-maker NCR may be both a good idea and a bad one at the same time, but you won’t understand it by looking only at the computer business.
Beyond the deal, however, there’s a story full of insights into world business, as well as lessons on what pushes a company or a country’s industry to the competitive edge and, not incidentally, a few perspectives for investors in AT&T;, the country’s most widely held common stock.
What AT&T; is effectively doing in the deal is trying to give its unsuccessful computer operation--a $2-billion revenues business--a good home with NCR, a competently managed computer company with strong sales in retail and automated teller terminals, especially overseas.
The hope is that AT&T;’s computers can join NCR’s profit-making lineup and AT&T; itself--the parent company that gets almost all its $36 billion in revenues from long-distance services and selling telephone equipment--can gain a profitable adjunct to its main business.
It is proposing to pay $90 a share or $6 billion, and may end up paying more than $100 a share, or $7 billion, to secure the prize--which may seem like a lot for a sideline business.
But AT&T; has its reasons. The company is involved in many parts of the computer business, from the Unix operating system, which AT&T; invented, to the heavy computer focus of Bell Laboratories’ research. So it feels that it must also make and sell computers.
AT&T; also sees that some of its rivals in global competition--Siemens of Germany, Fujitsu and NEC of Japan--have computer operations, and concludes that’s not a bad idea.
The competition is a high-stakes battle to be telecommunications supplier in a world where countries everywhere are modernizing their phone systems, replacing mechanical equipment with massive digital switches--essentially supercomputers for phone lines. The jobs are big: Italy, for example, is prepared to spend $28 billion over four years.
And AT&T; has been winning overseas business for two reasons. One is that its digital switches are a step ahead of international competitors because the U.S. telephone network modernized earlier than other countries. An interesting point is that the system upgraded to give AT&T;’s competitors--MCI and Sprint--a fair shake. Now AT&T; and U.S. competitiveness is benefiting.
Also, AT&T; is operating with some subtlety overseas. It formed a joint venture with the Italian state telephone company last year and recently formed a similar venture with Spain’s national company. In each case it makes an investment in the local country, and in each case it gains a major piece of the phone modernization business. It has also won phone jobs recently in Taiwan and Indonesia, and may soon announce a big job in the Soviet Union.
Furthermore, improved phones overseas mean more international calls to the United States, and thus more profit for AT&T;, the U.S. long-distance leader. Small wonder it has been fighting so hard to turn back the challenge of MCI and Sprint.
But the company’s mastery in telephones eluded it completely in computers. Since the 1984 break-up of the old AT&T;, computer operations have lost roughly $2 billion. This year, when AT&T; will earn $2.5 billion in overall profit, it will still lose $100 million in computers.
So AT&T; faced up to the fact that it couldn’t run a computer business and began to think of other companies that could. Lately it talked of merging computer operations with NCR, the old National Cash Register Co., and now has decided to buy it entirely.
The potential benefits are evident. NCR is strong in global markets, getting 60% of its sales and more than 77% of its profit overseas. As a subsidiary or division, NCR could give AT&T; competent management to run its computer business, freeing the phone giant to concentrate on what it does best.
But the costs seem unnecessarily high. Because NCR management is resisting the takeover, AT&T; will probably end up paying more than $100 per NCR share--rewarding NCR shareholders handsomely but at the expense of AT&T; shareholders.
AT&T; stock, already down a few points since the takeover bid was announced, could slip further because AT&T; may still have to take a writeoff on the computer equipment it puts into NCR. The new subsidiary won’t want to take on loss-making products and sully its own record.
“The writeoffs could be in the hundreds of millions,” says analyst James McCabe of Nomura Securities. But the real danger could come after the takeover, if AT&T; management interferes with NCR as giant companies always do. Then NCR’s profits could turn to AT&T-style; computer losses.
The question McCabe and other analysts ask is: Why must AT&T; buy the whole company? They suggest that the phone giant could instead make a major investment in NCR or form a joint venture with it.
Such a joint venture wouldn’t reward NCR shareholders as handsomely, but it would save money for AT&T; shareholders. And maybe AT&T; management should be thinking about that.
