AT&T; BREAKUP II : NEWS ANALYSIS: THE DEAL : A Message for U.S. Business : Action Says Focus, Not Size, Matters
In breaking itself in three, AT&T; is saying that focus is more important than size in business today--a remarkably contrary statement at a time when major U.S. corporations from Walt Disney Co. to Time Warner Inc. to Chemical Banking Corp. are seeking merger partners in pursuit of synergies or economies of scale.
For AT&T; to split its equipment manufacturing arm from its long-distance telephone business and to scrap its attempt--marked by the 1991 acquisition of NCR Corp.--to combine computing and telecommunications is a “wake-up call” to American industry, said one analyst.
What does that call say? Why is AT&T; marching to a different drummer?
Because companies that try to do too many things at once get in their own way, AT&T; Chairman Robert E. Allen suggested Wednesday. And just because a technology is new, doesn’t mean your company has to own it. Telecommunications analysts and consultants agreed, and so did investors, as they boosted AT&T; stock 10.6% to $63.75 a share.
“For AT&T;’s businesses to take advantage of growth opportunities in every part of the information industry, it has to separate into smaller and more focused businesses,” Allen said.
He was referring to the split-up of AT&T;’s telecommunications services--its $50-billion long-distance business, which has ambitions to offer local telephone service too--and the company’s huge, $20-billion telephone equipment business, which includes Western Electric’s manufacturing and Bell Laboratories’ legendary research.
The company also set up computer services as a separate unit and largely discontinued its computer manufacturing business.
AT&T; is not alone in separating its businesses. Sears has spun off its Allstate insurance subsidiary, and General Motors is divesting EDS, the Electronic Data Systems business it acquired from Ross Perot.
But clearly the broader trend reflects a belief in corporate America that bigger is better. In addition to highly publicized recent media industry and banking combinations, companies in the railroad business, health care, pharmaceuticals and paper, among others, are joining forces.
AT&T; has tried all that, however, acquiring not only NCR but smaller technology companies. The lesson learned, Allen told analysts, is that even when trends are undeniable, a good business isn’t built by running after them.
For example, Allen said, the vision that computing and telecommunications are “converging” happens to be correct. And differences are blurring between “hardware” and “software” in modern digital equipment, he acknowledged. But trying to manage both in a single company becomes difficult and counterproductive.
“The advantages of our size and scope are offset by the time and cost of integrating sometimes conflicting business strategies,” Allen said.
In a way, AT&T;’s action Wednesday marked the end of an era. Even before the original, government-ordered breakup of American Telephone & Telegraph in 1984, company officials and business experts saw computing as a proper frontier for the venerable phone company. AT&T; spent years gearing up to compete with International Business Machines, until the world changed for both companies.
Then AT&T; acquired NCR, intending to benefit from the convergence of personal computers and telecommunications. The benefit never materialized.
Still, telecommunications dominated the specific reasons for Wednesday’s breakup. AT&T;’s equipment business was hobbled by the perception among its customers--other phone companies--that in buying from AT&T; they were aiding a potential competitor.
AT&T; has made no secret of its ambitions to offer local telephone services in competition with its old affiliates, the regional Bell operating companies.
And the equipment divisions have also suffered in the growing foreign markets, where potential customers were uneasy buying from the same AT&T; company that is preparing to invade their home markets with what one expert calls the “premier telecommunications network in the world.”
The separation will spur competition and competitors on several fronts. Western Electric and Bell Laboratories will be able to go after customers here and abroad with new intensity. Again, focus is better than size. “They are excellent manufacturers, and this will free their hands,” said Peter Bernstein of Infonautics Inc., a New Jersey consulting firm.
And AT&T;’s communications business will ferociously invade local telephone markets and expand its activities in Internet and computing networks, analysts say. “AT&T; will now be able to ally with cable companies and offer local service outside the Bell companies’ loops,” USC telecommunications professor Michael Noll said.
That means the regional Bell companies (Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell and US West) will be forced to focus their sights as well.
“With an energized AT&T; bearing down on them, they better know what business they want to be in,” said analyst Alan Tomolillo of Probe Research, a communications consulting firm.
Considerations of shareholder value were also a major factor in the decision of AT&T; directors to split the company. Allen acknowledged that because of the firm’s money-losing computer division and the mix of telephone services and equipment, the stock market was not giving AT&T; all the value he felt it deserved.
Others agreed. “This will unlock a lot of value in the communications company, $10 billion or more,” William Davidson, a Redondo Beach telecommunications consultant, said soon after AT&T;’s announcement. He turned out to be right: AT&T; added roughly $9 billion in total stock value in Wednesday’s trading.
Investors were saying that whatever the rhetoric about synergies and diversification, the preferred course for a company is to concentrate on what it does best and avoid distractions. That’s the message AT&T; sent on Wednesday to U.S. business.
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AT&T; and Its Progeny
The communications giant announced Wednesday that it will split itself into three companies. Each will have a tighter focus on its markets and plenty of opportunity to grow. But each faces major challenges.
AT&T; Currently
Assets: $79.2 billion
1994 revenue: $75.1 billion
1994 earnings: $4.7 billion
1994 earnings per share: $3.01
Employees: 304,500
Chairman: Robert E. Allen
Business: Long-distance telephone service and equipment, cellular telephone service, computers, credit cards.
The New AT&T; Corp.
Operations: AT&T;’s long-distance services, AT&T; Universal Card, AT&T; Wireless (formerly McCaw Cellular), AT&T; Solutions (a consulting business) and a small piece of AT&T; Bell Laboratories.
1994 revenue: $49 billion
Chief executive: Robert E. Allen, current AT&T; chairman
Strengths:
* Dominant player in the lucrative long-distance telephone business
* Powerful brand name and plenty of cash for investment in new businesses; opportunities include local phone service, Internet access and entertainment and information services
* Good growth potential in wireless services
Weaknesses:
* Slowing growth declining margins in long-distance services, with Baby Bells poised to enter the market
* Massive investment required for entry into local phone business
* Little expertise in entertainment, information services and other potential new businesses
Current and future rivals: MCI, Sprint, regional Bell companies, Time Warner, Tele-Communications Inc., British Telecom, Electronic Data Systems, Andersen Consulting
AT&T; Global Information Solutions
Operations: Computer equipment, software and services
1994 revenue: $8 billion
Chief executive: Lars Nyberg, recruited from Dutch competitor Philips
Strengths:
* Good position in fast-growing computer niches such as financial services, retail and transaction processing
Weaknesses:
* Has lost money since it was created following AT&T;’s acquisition of NCR
* Poor position in personal computers; company will now buy them from an outside supplier
* Low morale due to mismanagement and layoffs
Rivals: IBM, Hewlett-Packard, Digital Equipment Corp., Unisys, Compaq Computer, Apple Computer
Note: The discrepancy between total revenue and the sum of division revenues is due to rounding.
Telecom equipment
Operations: Communications equipment development and manufacturing, including AT&T; Network Systems, AT&T; Paradyne, multimedia, microelectronics and most of Bell Laboratories; products include public network switching systems, office switching systems, cables and other transmission equipment, cellular phone gear and consumer telephones
1994 revenue: $20 billion
Chief executive: Richard A. McGinn, current chairman of Network Systems Group
Strengths:
* Strong product offerings in most areas and longstanding customer relationships
* New opportunities resulting from elimination of conflict of interest that had deterred some AT&T; phone service competitors from buying AT&T; gear
* Good technology base with Bell Laboratories
Weaknesses:
* Fierce competition and low margins in most businesses
* Fastest growth is overseas, where the company has traditionally been weakest
* Long-term technology trends that could make computer firms formidable new rivals
Rivals: Northern Telecom, Motorola, Alcatel, L.M. Ericsson, Siemens, NEC, Fujitsu
Sources: Bloomberg Business News, Times and wire reports
Researched by JENNIFER OLDHAM / Los Angeles Times
