An AT&T; for Risk Takers? Could Be
AT&T; used to be the stock most suitable for widows and orphans to buy with safety. But today major investors are throwing eggs at it, as was clear last week when John Walter, AT&T;’s new president, told Wall Street analysts that the company plans to invest up to $9 billion to help it gain new business on the Internet and customers for local telephone service.
AT&T; profits will fall this year and probably next, Walter said, but within five years they will rebound to almost double current levels.
Reaction was swift and negative. AT&T; stock dropped $3 a share to $36.875 immediately after Walter spoke, losing fully $5 billion, or 7.5%, of its market value. It fell a bit further through the rest of the week and closed Friday at $36.25.
Thereby hangs a tale for the millions of investors who own AT&T; stock. Times have changed and AT&T; has to change with them. And so it is no longer the stock for widows and orphans to put away for stability and safe dividends, even though its returns to investors over the last decade have been very good indeed.
Now AT&T; has to become a technology company, competing with scores of other fast-moving firms in uncharted fields. And its prospects as a technology stock, in which risk-taking investors look for capital gains, can be gauged from a look at this big corporation as Walter sets out to fix it.
AT&T;, the telephone company broken up in 1984 into long-distance and local operating entities, should have been at the center of many changes in communications technology. Yet it has stumbled around like a wounded giant since the breakup. In the 1980s it tried several ventures in computers, suffered losses and in a desperation move paid $7 billion to acquire computer maker NCR in 1991. That never worked out, and after further write-offs, NCR was spun off last year as an independent company.
Spinoffs can succeed. AT&T; also spun off its Western Electric and Bell Laboratories operations as Lucent Technologies, which is now a thriving separate company.
And some acquisitions have been smart. AT&T; paid $11.5 billion in 1994 for McCaw Cellular, and that has given it a lead in cellular telephony, along with a new wireless communication technology that AT&T; hopes to use for a dramatic breakthrough in residential phone service.
In fact, investors who have owned AT&T; over the last 10 years have seen their investment more than triple in value, counting dividends and the value of the separated Lucent and NCR shares.
But investment analysts question future prospects for an AT&T; that gets close to 90% of its $52 billion sales and $6 billion net income from long-distance telephone service. That’s a business in which AT&T;’s market share is eroding and its profit declining by nearly $1 billion a year.
What is Walter, 50, going to do about that? He is going to do what he did at R.R. Donnelley & Sons Co., the Chicago-based printer where he worked for 27 years and rose to chief executive before coming to AT&T; last year.
Donnelley was a 130-year-old family company whose printing business was being drastically changed by computers when Walter became a sales manager in 1977. Walter, whose formal education is in business administration, pushed Donnelley into computerization. He increased sales from $2 billion to $6.5 billion and shook up employees with demands that senior managers buy stock and by spreading stock option incentives throughout the work force.
He also made mistakes in acquiring technology companies, and Donnelley lost money the year Walter left. So Walter’s record is mixed, although analyst Rudolf Hokanson of the Deutsche Morgan Grenfell investment firm gives him the benefit of the doubt. Donnelley can survive today, Hokanson says, because Walter pushed it in the direction it needed to go.
At AT&T;, Walter is going to support advanced technology, such as the company’s Internet services for consumers and business.
He is going to push the company’s invasion of the $500-billion market for local telephone service--five times larger than the long-distance market--with a wireless instrument that will serve as a single phone for home, car and outdoor use.
He is going to cut $2.6 billion, or at least 9%, from AT&T;’s expenses. “There’s plenty of room to cut expenses at that company,” remarks William Davidson of Mesa Research, a Redondo Beach telecommunications consulting firm.
And Walter will give incentive stock options to 9,000 managers and demand that senior managers beef up their share ownership.
Nothing will be easy. The intention of federal telecom legislation and the direction of technology advancements favor more--not fewer--competitors in local service, says analyst Jack Grubman of Salomon Bros.
In Internet commerce, AT&T; has the most customers so far, but competitors such as MCI and WorldCom may be better positioned for future growth, says analyst Peter Bernstein of Infonautics Consulting, a Ramsey, N.J., firm.
To succeed, Walter will have to understand that AT&T;’s real advantage is reliability, as demonstrated by its WorldNet Internet service at a time when America Online is failing customers. Reliability is a legacy of AT&T;’s 100 years of service orientation, which preceded the broken-up-and-stumbling era.
Does Walter understand that? Nobody really knows yet, just as nobody knows whether customers want a single wireless phone for all their needs. The curse and the beauty of running a technology business, or owning a technology stock, is that nobody truly knows the answers.
And that’s why AT&T; is no longer a widows-and-orphans stock.
Whether it becomes a good technology stock will depend on the vision Walter brings to managers and employees as they fight competitive battles. Coca-Cola, Johnson & Johnson, Hewlett-Packard and perhaps Intel have vision; IBM had it and lost it.
At Donnelley, Walter knew printing had to come into the computer age. At AT&T; he comes in knowing that the telephone has to come into the age of the Internet.
If by that vision he can make AT&T; a fast-moving technology outfit, the company will prosper and its stock will rise. But in business, as in football, execution is everything. Walter has the ball. Let’s see what he does with it.
