AT&T;, in One Piece or Many, Must Prove Itself

A lot of Wall Street sentiment favors a new breakup of AT&T;, which is a terrible idea at the moment because the big telecommunications company’s stock is near its low. By one estimate, AT&T;’s many assets could bring a total of only $43 a share in public spinoffs, an uninteresting premium over today’s stock price.

But it’s an idea with possibilities for AT&T;’s future.

In fact, management at AT&T;’s New York headquarters is committed to spinning off the company’s $8-billion wireless business to give it greater visibility for public markets and flexibility for business operations.

And management is contemplating a spinoff of AT&T;’s consumer long-distance division, with revenue of roughly $20 billion a year, to remove the drag of declining long-distance business from AT&T;’s accounts.

The giant company, which has more than $62 billion in annual revenue, has reached a critical testing time. In the last three years, AT&T; has invested more than $120 billion in stock and cash to acquire cable companies and build the U.S.’ largest, most advanced fiber network for broadband communications over the Internet.

But AT&T;’s stock price has slipped to $30.25 a share from $61 late last year because Wall Street is impatient to see results from AT&T;’s massive investments.

Sure, the stock market is normally impatient--and investors are turning away from almost all telecommunications companies right now.

But Wall Street aside, AT&T; needs to demonstrate that a big, technologically powerful company can operate efficiently to satisfy customers and keep costs in line.

In AT&T;’s challenge to prove itself in a new age, we can see lessons for all business and for all investors. This company, after all, still has 5 million shareholders and was once considered the safe holding for “widows and orphans.”

What AT&T; must do, in a word, is execute on the strategy outlined by Chief Executive C. Michael Armstrong that AT&T; is to be the supercarrier of communications for business and consumers, over the Internet or by conventional phone, cable and wireless systems.

It’s a strategy rooted in AT&T;’s long history, which dates to the formation of the national telephone system that AT&T; ran as a regulated monopoly for more than eight decades until antitrust pressure forced its breakup in 1984.

Armstrong, 62, a former top executive at IBM and Hughes Electronics, a division of General Motors, doesn’t want to reintroduce monopoly but to achieve leadership in a competitive market. “If there’s one thing AT&T; knows how to do, it’s manage communications,” Armstrong has said--meaning the company should be the natural choice for business to turn to.

The company’s technological prowess is remarkable. Its newest fiber network, now being built to connect 30 U.S. cities at a cost of $1 billion, will be able to put 160 wavelengths on a single, hair-thin strand of glass fiber. That kind of capacity will make possible whole new dimensions of communications within this decade.

Yet AT&T; hasn’t been able to attract business customers to its services fast enough. And in fact the company stumbled badly and lost corporate customers early this year through sheer mismanagement.

The consumer long-distance business has been declining faster than Armstrong would have liked--he wants to use long distance’s $5-billion-a-year cash flow to invest in the newer businesses. But competition will get tougher as former regional Bells Verizon and SBC Communications get into long-distance.

AT&T;’s broadband Internet services--$5 billion in revenue last year--is growing 65% a year. But achieving returns on the investment needed to connect customers takes time. And AT&T; doesn’t have good control of its costs. “We’re trying to get the payoff period down to four to five years from nine to 10,” says William Davidson, of Redrock Capital, a communications investor who often consults for AT&T.;

So what should this big, old company do to succeed in the new age? A restructuring, even a breakup into separate companies, makes sense if carried out artfully.

Long-distance can be spun off. Armstrong reportedly favors this step, and it’s a good idea.

Even though long-distance is a fading business--Internet telephony will replace cents-per-minute phone calls in the next 10 years, experts say--today’s long-distance business could be distributed to shareholders or sold as a depleting asset, throwing off a dividend each year.

Or it could be revitalized under managers who would treat it as a business to develop--offer consumers different services, be entrepreneurial about adjusting rates. “Managers of the long-distance business by itself could give it new life,” says Douglas Christopher, head of research at Crowell Weedon, a Los Angeles brokerage firm.

Secondly, AT&T; has to realize that building the most technologically sophisticated Internet network is only the first step to success today. “Lots of other companies are building Internet infrastructure--WorldCom, Williams Communications, a new outfit named Aerie Networks,” says Jeanne Shaaf, senior analyst at Forrester Research, a Cambridge, Mass., firm that advises big companies on communications.

AT&T; has to work with partners to devise services for its network. On that score, however, old AT&T; may have learned something. The company is working with partners to build the new Internet network and recently formed a venture with IBM to develop Web-page services for business customers.

Can AT&T; truly reform? One reason for investor doubts is the suspicion that AT&T; remains stuck in the mold of the regulated monopoly that rejected advice from outsiders. Armstrong was hired in 1997 specifically to change that culture.

With three more years to go on his six-year contract, Armstrong has been only partly successful. He is being criticized these days because AT&T; is not yet measuring up to his ambitious goals or to investor expectations of only a few years ago.

But the investments AT&T; has made and is making will take a few years to come to fruition. Bringing the company through to that time of payoff will take good management. So this is a testing time for Armstrong as well as for AT&T.;

And in that respect, an unconfirmed report last week that AT&T; would sell its AT&T; Wireless company to Nextel Communications was notable and ironic. Nextel is a successful, $6-billion wireless company backed by entrepreneur Craig McCaw.

AT&T; got into wireless telephony in 1994 by paying McCaw almost $13 billion for his earlier firm, McCaw Communications. Giant AT&T; therefore had the pioneer of wireless telephony within its walls, ready to give it a head start in the new field.

But the AT&T; managers at that time wanted no part of McCaw’s ideas or anybody else’s. So McCaw departed and invested heavily in Nextel and several other companies.

The meaning for Armstrong and AT&T; is clear: The company needs entrepreneurs like McCaw to run its broadband network and all its other businesses. If Armstrong can find a way to inspire such people in a large company, fine. If not, he should break AT&T; into smaller pieces that can inspire them.

The world has changed. That’s why AT&T; is no longer the safe stock for widows and orphans. But AT&T; has a great future--if it can manage it.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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Less Than the Sum of Its Parts?

AT&T;, formerly American Telephone & Telegraph Corp., was once the stock for “widows and orphans,” so predictable and regular were its profit, dividends and stock price. But AT&T;, split up and deregulated 16 years ago, is too volatile for widow and orphan accounts today.

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It sells at less than half its historic high price, reached last year

January 1999: $64.10 (historic high)

Friday: $30.25

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... and brokerages are urging a breakup of AT&T.; But they vary in estimates of the per-share price a breakup would bring.

Merrill Lynch: $43

Crowell Weedon: $60

Credit Suisse First Boston: $73