AT&T; Will Split Into 3 Companies : Communications: The corporate giant bucks the consolidation trend in order to seek competitive agility. It will spin off its equipment and computer businesses.
Barely a decade after being broken up in the biggest corporate divestiture in history, AT&T; Corp. said Wednesday it is breaking up again. Bucking the consolidation trend that is sweeping corporate America, the communications giant said that it will spin off its equipment business and its troubled computer business to focus on its core communications services operations. The radical and unexpected move is designed to eliminate some damaging conflicts and enable each of the businesses to better compete in fast-changing global markets.
“This is the next logical turn in our journey since divestiture,” said AT&T; Chairman Robert E. Allen at a press conference in New York. “The single purpose is to give AT&T;’s businesses the nimbleness and the agility to seize the best of their market opportunities.”
Wall Street was delighted by the breakup plan, sending AT&T; shares--the most widely held securities in the country--soaring $6.125 to close at $63.75 in very heavy New York Stock Exchange trading Wednesday. Current AT&T; shareholders will receive stock in each of the two new companies.
Industry analysts were similarly impressed, noting that AT&T; would be shedding a money-losing computer operation and freeing itself to exploit a welter of new opportunities in local and international telephone service--and in the burgeoning multimedia information and entertainment arena.
While the slimmed-down AT&T; would have about $50 billion in revenue, a third less than it does today, it would be far more profitable, with lucrative businesses in long distance, telephone credit cards, and especially wireless communications as a result of its $11.5-billion acquisition in 1994 of McCaw Cellular Communications Inc., the nation’s largest cellular telephone company.
The complicated transaction to break up AT&T; is expected to be completed by the end of 1996.
The newly created, $20-billion communications equipment company, as-yet unnamed, would benefit by escaping from an awkward situation in which its biggest customers--local telephone companies--are prospective AT&T; competitors.
And the computer unit, formerly NCR--which has been in a downhill slide ever since AT&T; acquired it in 1991--would get a fresh start, albeit a painful one: AT&T; said it will cut 8,500 jobs, or 20% of the work force, at the company before the spinoff and take a $1.5-billion charge to cover the costs.
The second breakup of one of America’s best-known corporate icons--a company which has dominated communications for more than a century and nurtured countless major inventions in its famed Bell Laboratories--was spurred in part by the expected passage this fall of a major telecommunications deregulation bill.
The controversial legislation will enable the companies created by the 1984 breakup of the old AT&T--the; so-called regional Bell operating companies, or “Baby Bells”--to compete with AT&T; in the long-distance business, while allowing AT&T; into the local phone business. It is also expected to draw phone companies into the cable TV business, and vice versa.
“They are recognizing reality,” says John Clark, a telecommunications analyst with Daiwa Research. “Regulatory changes are coming up, and they’ve been hobbled by a lack of focus.”
“They were a formidable company when they were improperly structured and they will be a formidable competitor now,” said Tim Price, president of MCI Telecommunications Corp., a unit of long-distance giant MCI Communications Inc. “They’ve just, in essence, opened up the kennel door and let out their worst and mangiest flea-bitten dogs.”
MCI, AT&T;’s main rival in the long-distance business, recently invested $2 billion in Rupert Murdoch’s News Corp. as part of an effort to get into the “content” side of the communications business, and some expect AT&T; to move in a similar direction. Long-distance service, while lucrative, is increasingly a commodity business, and some see big advantages in owning not only the only the communications lines themselves, but the information and entertainment services that increasingly flow across them.
While AT&T;’s decision to shed its computer business was anticipated by many on Wall Street, the spinoff of the communications unit took nearly everyone in the industry by surprise. However logical it may appear in hindsight, it is highly unusual for a chief executive to initiate a move that will so substantially shrink his own domain.
And the initiative comes just as many companies in other segments of the communications industry are insisting that bigger is better. Time Warner Inc., for example, is angling to acquire Turner Broadcasting System Inc., and Walt Disney Co. has agreed to acquire Capitol Cities/ABC Inc.
But AT&T;’s chief executive, Allen, has been through a divestiture before and seen the benefits: He was on the task force for the 1984 break-up that shattered the old Bell System. Though that breakup came only as a result of an antitrust lawsuit by the Justice Department, it proved to be a huge boon for AT&T; shareholders as well as a highly effective public policy initiative.
The combined annual return on AT&T; and the Baby Bells offspring since the breakup, for example, has been an astounding 18%, and the United States boasts the most competitive and innovative communications market in the world.
Still, the breakup is as much an acknowledgment of where AT&T; has failed as it is a bold move to win new markets.
“AT&T; realizes that it is a service company and that long distance is the great cash cow,” said A. Michael Noll, a professor of communications at USC.
The exclusive focus on services is a dramatic shift for a company whose culture has long been imbued with the importance of basic technology and manufacturing. The company was built upon a technical breakthrough by Alexander Graham Bell, and the company’s Bell Laboratories has produced seminal inventions ranging from the integrated circuit to the communications satellite to the cellular telephone. While the company over the decades was often resented for its sheer might--and periodically sued by the government--it has likewise been admired for its technical brilliance and top-flight phone system.
But while its profits since divestiture have come mainly from long-distance services, AT&T; has made repeated forays into the manufacturing world, attempting to build markets in semiconductors, multimedia consumer electronics and computers.
AT&T; has failed in all these areas, most spectacularly in computers. That’s ironic, because the big opportunity that AT&T; was supposed to gain from the 1984 divestiture was the opportunity to compete in the computer business, from which it was barred by an earlier consent decree.
Just as IBM failed in the communications business and the Baby Bells have failed in all their non-telephone businesses, however, AT&T; proved singularly inept in computers. After years of false starts and heavy losses, it finally moved to buy its way out of the problem when it bought NCR Corp. in 1991 for almost $7.5 billion.
That proved to be the biggest failure of all: AT&T; misunderstood the company’s prospects, drove out competent managers with ham-handed efforts to instill an AT&T; culture, and suffered billions of dollars in losses.
Similarly, the company has made ill-advised investments in companies that aimed to produce hand-held personal communicators, next-generation video game machines and other newfangled devices.
Having learned its lesson, AT&T; will now focus on a global phone services industry that market researcher Dataquest estimates will be worth an astounding $680 billion by 1997. By entering the local phone business, it may again be able to build a national phone system, as it did brutally and effectively under legendary president Theodore Vail in the first two decades of this century.
And its offspring will be free to do what they do best.
“This may show that it’s not important to own all of the converging technologies,” Allen acknowledged. “It reached the point where the advantages of integration were being offset by the complexity” of carrying out integration.
The new equipment company, which includes products ranging from consumer items such as cordless phones to giant telephone switches, will still be among the nation’s largest technology companies. And it may now find telephone companies more willing to buy switching gear from a firm that isn’t also trying to compete with them on the phone service side.
“When AT&T; announced they would go into Mexico to compete with Telmex [Telefonos de Mexico] in phone service,” says Richard Toole, telecom analyst at Merrill Lynch, “you have to believe Telmex would be reluctant to buy equipment from AT&T.;”
Opportunities in overseas markets are key as developing countries invest huge sums in improving their phone services. Analysts predict the global telephone equipment market will grow at close to 10% a year, and be worth $187 billion in 1997. AT&T; has for a decade been clawing its way back into an international phone equipment business it gave up in 1925, when its overseas manufacturing operations were sold to ITT Corp. to avoid a possible antitrust suit.
The Baby Bells, AT&T;’s biggest customers, will also be more willing to buy equipment from a company that is not also competing with them in providing phone services.
“That combination of dominant presence in two key areas of the industry always had an inherent potential for conflict,” said Raymond Smith, the feisty chairman of Bell Atlantic Corp., one of the Baby Bells. “While this does not completely solve this problem, it is a move in the right direction.”
Still, Bell Laboratories could end up a loser in the deal. The laboratory has already become far less important a factor in basic research, and analysts expect that role to continue to decline when it’s attached to an equipment company with far fewer resources.
And the prospects for the computer company are uncertain: AT&T; said Wednesday that it would abandon personal computer manufacturing entirely, and it faces brutal competition from a host of strong players in nearly all its markets.
The transition, meanwhile, could prove tough for all three companies: It involves a complex series of deals that will not be completed until late next year.
“Until we complete this transaction there is going to be a high level of anxiety,” Allen told reporters later. In a letter to employees, he asked them “not [to] be distracted by the transition.”
Some said AT&T; appears not to have thoroughly worked out the issues involved.
“I was surprised at the lack of detail they gave,” said Toole. “There is a lot of book work to be done.”
AT&T; also said Wednesday that it will sell its 80% interest in AT&T; Capital, a publicly traded company that finances sales of AT&T; equipment. AT&T; will use $1.4 billion in expected revenue from sale of the company to help pay down some of its $26 billion in debt.
Allen is also considering a public offering of 15% of the communications equipment company early next year. With the exception of those newly issued shares, the newly created companies will be owned by existing AT&T; shareholders.
Times staff writer Jube Shiver contributed to this story.
* BETTER FOCUS: Why AT&T; is breaking up when others are merging. D1
* MORE COVERAGE: D1, D3-D5
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AT&T; Breaking Up--Again
With the restructuring announced Wednesday, AT&T; will split into three companies, each with its own specialty. It is the biggest voluntary corporate breakup in history.
THE 3 NEW COMPANIES
No. 1: Communications
It will retain the AT&T; Corp. name and include its telephone business, credit card company and wireless communications operation.
No. 2: Equipment
Still unnamed, it will consist of AT&T;’s equipment-making operations and multimedia and microelectronics units.
No. 3: Computing
It will consist of the computer unit, Global Information Solutions, after the unit is restructured. It will no longer make personal computers but will sell them through a supplier.
