Hey, AT & T Can Spot a Bargain (15 Months Later)
There was a great time for everyone--including AT&T; Corp.--to be buying shares of cable TV titan Tele-Communications Inc. But it wasn’t last week.
That great opportunity occurred between October 1996 and April 1997, when TCI’s stock languished between $11 and $15 a share, far below the $45-or-so per share that AT&T; last week agreed to pay in a blockbuster $46-billion takeover bid.
If AT&T; just 15 months ago had been able to see in TCI then what it evidently sees now--the perfect “last mile” of the information highway, into nearly one-third of U.S. households--it might have been able to do the deal for half, or less, of today’s cost.
Of course, AT&T;’s offer, like so many other takeover bids today, uses stock rather than cash as the currency. And AT&T; stock, while around $65 a share when the deal was announced Wednesday, traded in the $30-to-$40 range in late 1996 and early 1997.
So AT&T; had a less valuable currency back then. But it could have bought an even more devalued currency in depressed TCI.
There are plenty of good reasons this deal didn’t happen 15 months ago, not the least of which is that current AT&T; Chief Executive C. Michael Armstrong wasn’t running the show then. And nobody ever accused former AT&T; CEO Robert Allen of being a visionary.
It’s also quite possible that wily TCI Chairman John Malone would have balked at selling the business at that price point.
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But the deal might have been tougher to pull off for another reason, one that in large part explains the continuing takeover mania and the U.S. bull market’s stunning longevity. That is: Psychologically, it’s easier for most investors to buy stocks when they’re high than when they’re low. Ditto for many corporate managers who want to expand their businesses via acquisitions.
“Nobody loves you when you’re down,” someone once sang, and it’s all too true on Wall Street. Investors in TCI were practically giving the stock away in the spring of 1997 as faith in the company’s long-term prospects evaporated.
Certainly, TCI needed fixing: Its debt load, even for the forever debt-heavy cable industry, was too high. And investors needed some fresh sign that cable’s promise to deliver new information services to American consumers--after years of talk--wasn’t just a bad joke.
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Two things began to change some minds about TCI on Wall Street. First, Malone brought in Leo Hindery as president to clean up the company’s financial mess.
Second, Microsoft Corp. a year ago made a $1-billion investment in TCI rival Comcast Corp., a strong vote of confidence in cable’s future as an information-delivery pipeline from arguably the most powerful man in technology, Mr. Bill Gates.
By October of last year, TCI shares had climbed back above $20. The rising price put TCI back on Wall Street radar screens, attracting still more investors and resurrecting the company’s image as a major player in the media business.
Suddenly, many of the same investors who wouldn’t touch TCI at $11 a share early in 1997 were happy to pay $20, $25, $35 and--ultimately--$44 at the stock’s intraday peak last week.
Yet it is substantially the same (money-losing) franchise today as 15 months ago from the standpoint of parent-to-be AT&T;, which is really interested in what’s on the other end of the cable: you and me.
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To put it another way, the investors who like this deal like it because, in the words of fund manager Warren Lammert at Janus Funds in Denver, “I think the [merged] company has the best consumer brand [in AT&T;] and the best pipeline [in TCI].”
All of which would have been just as true 15 months ago, if you could see, as Hindery did, how TCI’s image could be revitalized with some debt reduction and by revamping top management.
But just as most investors didn’t want TCI at $11 a share, AT&T; management probably would have been hard-pressed to sell this deal to the company’s directors when TCI looked like a shipwreck.
“Buy that loser? Say what?”
As it is, AT&T; shareholders are upset enough by the deal’s potential for near-term earnings dilution. They have pushed the stock down 17% from its recent peak, to $56.75 as of Friday.
Imagine how those shareholders would have reacted if former AT&T; chief Allen, who drastically overpaid for computer giant NCR Corp. in 1991, had tried to sell them on TCI when almost no one on Wall Street had a good thing to say about cable.
Though it seems rather counter-intuitive, TCI stock had to rise in price for most investors to notice that it was a bargain--and for potential acquirers to judge TCI a worthy merger partner.
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A gutsy bottom-fisher would be having the last laugh here, but bottom-fishing usually means taking on above-average risk. After all, no one could have said for sure 15 months ago that TCI would turn itself around, let alone quadruple in price.
The bigger lesson is an old one: that nothing succeeds like success. Investors’ appetite for U.S. stocks today is far greater than it was three years ago, when stocks were far cheaper. Unlike with most things, consumers feel more comfortable paying up for stocks than paying down.
So demand for equities now feeds on itself. And there is plenty of money around, with the U.S. economy, and consumers’ pocketbooks, in robust shape. Asia’s woes have, on balance, helped us, by slashing interest rates and oil prices.
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Likewise, the pace of U.S. corporate mergers this year is already twice last year’s record. High stock prices don’t deter corporate buyers. And why should they--when those same high stock prices give the acquirers a rich currency with which to do deals?
Every investor wonders when this fantastic party will end. The market’s message--with stocks’ fast rebound last week lifting the blue-chip Standard & Poor’s 500 index to a new high--seems to be simply, “Not yet.”
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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.
