Microsoft Reports $933 Mln Paper Loss on AT&T Stake
Washington, Oct. 4 (Bloomberg) -- Microsoft Corp. reported that the value of its stake in AT&T Corp. dropped almost $1 billion below the original purchase price during the software maker's most recent fiscal year.
Microsoft, the Redmond, Washington-based developer of Windows software, paid $4.74 billion to New York-based AT&T during May 1999 to purchase a special issue of convertible preferred securities.
In an annual report filed with the Securities and Exchange Commission, Microsoft estimated that the value of this investment had fallen almost 20 percent to $3.81 billion during the fiscal year ended June 30.
To some degree, this paper loss reflects the 52 percent decline in the AT&T common shares that Microsoft would receive upon exercising its conversion option. It shows that even AT&T's biggest backers are suffering as the nation's largest long distance company, along with other telephone businesses, remains out of favor on Wall Street.
``AT&T as a stock is really awfully depressed,'' said Jane O'Keeffe, president of Davis Dinsmore Management Co., a Morristown, New Jersey, manager of two closed-end convertible funds. ``Certainly there has to be some value to one of the largest global communications networks in the world.''
Convertible
Because the convertible preferred securities aren't publicly traded, Microsoft must make its own estimate on their value for its annual financial statements. Microsoft lists the convertible preferred in the financial statements as long-term debt securities, and calculated the change in value through an analysis of comparable corporate bonds with a similar yield and maturity, according to Microsoft spokeswoman Caroline Boren.
The convertible preferred securities have a face value of $5 billion, mature in 2029 and pay interest at an annual rate of 5 percent. Microsoft can convert the securities into 66.7 million shares of AT&T common stock at a price of $75 each.
AT&T shares closed at 61.94 on May 6, 1999, the day that Microsoft and AT&T announced the investment. The stock has since fallen to below 30, representing more than a 50 percent decline. AT&T shares rose 63 cents to 29.75 in today's trading.
Nevertheless, Microsoft takes a long-term view of its AT&T investment, which was made as part of the software company's effort to accelerate the development of a broadband, or high- capacity, infrastructure in the U.S.
AT&T's cable-television system will provide the broadband pipes needed to deliver interactive services that employ Microsoft software.
``Having a broadband infrastructure in place is really a core piece of what is needed to make this whole new generation of interactive services available to people,'' said Ed Graczyk, director of marketing for the Microsoft TV platform group.
Because convertible preferred securities can be converted into common stock, they generally decline in value when the underlying shares fall. However, the decline is less steep for the convertible preferred because the securities carry an annual interest payment and also are repaid in full by the issuer when they mature.
``The convertibles still outperform the underlying common stock when you have a decline, but they suffer pretty large declines as well,'' said Lisa Gregg, portfolio manager for the Castle Convertible Fund.
Oct/04/2000 17:42 ET
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