AT&T; BREAKUP II : OUTLOOK: THE EQUIPMENT COMPANY : Spinoff Should Be Tough Competitor, Analysts Predict : Telecom: The biggest bonus for the new network systems and products group is that it won’t have AT&T;’s brand name.


The second breakup of AT&T; is likely to pave the way for its new communications equipment company to become a premier independent vendor of telephone switching systems, fiber-optic cable and business phone and voice mail systems, company executives and analysts said Wednesday.

When AT&T;’s network systems and products groups are spun off with the fabled Bell Laboratories, vowed Chairman and Chief Executive Robert E. Allen, the resulting company will be a “formidable competitor” in the worldwide market for network systems, which he pegged at about $150 billion and growing 9% a year.

The biggest bonus for the new company--which has not yet been named--is that it will no longer be linked to AT&T;’s communications service businesses. That tie has been a problem because the equipment side had been trying to sell to customers, such as regional phone companies, that are competitors in the service arena.


“Having the AT&T; brand on their equipment pieces was becoming a real liability,” said Anna-Maria Kovacs, vice president of research at Janney Montgomery Scott in Philadelphia. “Their potential customers were saying, ‘Why should I spend money on my competitor? Why should I open up my plans to them?’ ”

AT&T; produces network infrastructure equipment such as switches and fiber-optic cable, answering services, telephones, private business exchanges, data communications equipment and microelectronics components. Richard A. McGinn, chief executive of AT&T;’s Network Systems Group, will be interim leader of the equipment business.

The units that will make up the new company had combined revenue of $20 billion last year, placing it “comfortably within the top 40 of the Fortune 500,” Allen said in a telephone news conference from AT&T; headquarters in New York. “It’s a pretty good-sized start-up.”

The new equipment business will compete with AT&T;’s traditional overseas competitors--Alcatel Alsthom of France, LM Ericsson of Sweden, Germany’s Siemens, and Japan’s Fujitsu and NEC Corp. At home, AT&T; competes mainly with Northern Telecom, a Canadian company that does most of its business in the United States, and with Motorola in the market for wireless communications equipment.

Analysts expect telecommunications companies to pour billions of dollars into equipment in 1996 and 1997 as they build broad-band networks capable of transmitting video images as well as voice. AT&T; could have missed out on much of that business if its equipment division were still linked to the service business that competes with its potential customers, analysts said.

“These companies are going to say, ‘Now that it’s an independent company, we can work with it,’ ” Kovacs said.


None of the new company’s competitors can boast of a research and development unit as formidable as Bell Labs, the birthplace of cellular phone technology. While analysts agreed that would give it a technological advantage, several also worried that carrying the cost of the famed lab could hurt the bottom line.

Allen said he expects the new equipment business to have “a somewhat different base of investors” than today’s AT&T;, so the company is considering an initial public offering of about 15% of its equity in the first quarter of 1996. The breakup will probably be finalized toward the end of next year, he said.

“The aficionados of telecommunications equipment will be able to go into that as a relatively pure play,” and that should boost the stock price for the equipment business, said Sheldon Grodsky, director of research for Grodsky Associates in South Orange, N.J.

Kovacs estimated the per-share value of the spun-off equipment company at $8.