Could Novell benefit from a move like this?
Regards,
Peter J Strifas
AT&T to Restructure Into Four New Companies
October 25, 2000 3:12 pm EST
By Jessica Hall
NEW YORK (Reuters) - AT&T Corp. on Wednesday said it would restructure into a family of four separately traded companies, marking the biggest reorganization of the corporate icon since its 1984 break-up that created the Baby Bells.
The move dismantles nearly three years of bold acquisitions, worth more than $100 billion, by the largest U.S. long-distance telephone and cable television company and comes after AT&T's stock has dropped by nearly half this year.
Investors reacted coolly to the restructuring plan, which was announced as AT&T reported lackluster third-quarter results and slashed its growth outlook for the next 15 months. AT&T's stock was down 13 percent.
AT&T (T.N) said its third-quarter profits fell 12 percent as long-distance price wars and increased competition hobbled revenue growth in its business services unit and pushed sales to consumers down 11 percent.
"Financial engineering is only going to kind of offset the lousy fundamentals in business and consumer," said one industry analyst, who declined to be identified. "It puts somewhat of a silver lining on a very dark cloud."
Salomon Smith Barney analyst Jack Grubman, one of Wall Street's most influential analysts, downgraded AT&T's stock to "neutral" from "outperform," saying, "We believe the business is melting down." Janney Montgomery Scott analyst Anna-Maria Kovacs put a "sell" rating on the stock, and rating agency Fitch said it might cut AT&T's debt ratings.
The restructuring will allow each of AT&T's major units -- consumer, business, broadband and wireless -- to focus on its particular market niche and compete more nimbly, AT&T said.
The new companies' dividends will be "substantially less" than AT&T's current dividend, it said. That essentially ends AT&T's legacy as a safe-haven stock for widows and orphans.
AT&T shares were down $3-5/8, or 13 percent, to $23-1/4 in afternoon trading on the New York Stock Exchange.
AT&T CALLS PLAN "LOGICAL AND NECESSARY"
As separate stocks, investors will be able to track the growth or decline of each unit instead of trying to value the entire conglomerate with its disparate parts.
Analysts criticized the deal, saying AT&T buckled under the pressure of its weak stock price rather than sticking to its long-term strategy.
"I think it's the beginning of the end of an icon. It's a sad day in corporate history. It's the surrender to Wall Street, which was foolishly looking for near-term results and stock gains on a five- to 10-year turnaround project," said Gartner Group analyst Ken McGee.
The reorganization marks a reversal of AT&T's strategy to become an "all distance" communications company that sold packages of local, long-distance, wireless telephone and Internet access services.
"They are going to have to prove that this restructuring is going to put the company on the right track," said Stanley Nabi, vice chairman at DLJ Asset Management, with $35 billion under management. "When a company has an operation that is losing money, and they sell it, they write it off. Here, all they are doing is reshuffling the deck."
AT&T defended its move as a logical next step to create shareholder value and dismissed criticism that it had abandoned its long-term strategy.
The reorganization "was not a short-term financial engineering step at all," AT&T Chairman C. Michael Armstrong told Reuters in an interview. "This phase of our future needed to be addressed ... this was done for very fundamental and strategic reasons."
Armstrong told a meeting with analysts that it "seems to be a lot of fun to write that this is a reversal or a repudiation of our strategy. I find that not only wrong, but offensive.
"After 30 to 40 companies being integrated and the tens of million of dollars of investment in ourselves, to suggest that this phase of the transformation is some kind of repudiation, I just don't buy into it ... the journey hasn't been simple, but I think the outcome is going to be very successful."
DID ARMSTRONG RUN OUT OF TIME?
Over the past few months, AT&T has weighed several options to boost its stock and distinguish its fast-growing data, Internet and broadband cable television units from its struggling consumer long-distance business.
Armstrong compared the struggle to transform AT&T in the face of an evaporating long-distance telephone industry to his tenure at Hughes Electronics Corp.(GMH.N). Armstrong joined Hughes just as government defense industry spending halved, forcing him to reorganize, cut jobs, divest units and focus on new growth markets such as commercial satellite services.
Some analysts viewed the AT&T reorganization as a sign that Armstrong ran out of time in his ambitious attempt to create a massive telephone, data and cable conglomerate.
AT&T became a casualty of investor impatience and a broad decline in telecommunications stock prices. The long-distance telephone market also collapsed more quickly than AT&T and the rest of the industry expected.
"They failed to rise to the occasion to become a new-era company. They're still a big, fat, dumb telephone company ... the employees did not rise to the occasion in the legacy areas of the business by letting go of bureaucratic, lethargic and arrogant ways," McGee said.
Under the plan, which AT&T expects to complete in 2002, shareholders ultimately would own stock in four businesses.
AT&T's wireless and broadband cable television businesses will trade as independent common stocks. AT&T's shrinking consumer telephone business will become a tracking stock, while the principal AT&T entity will be its business-services unit.
The business-services company, AT&T Business, which provides communications and networking to corporate customers, will trade on the New York Stock Exchange under the company's existing "T" stock symbol. It will also be the legal owner of the AT&T brand, which it will license to the other companies.
AT&T Business will be the parent company of the AT&T Consumer business, which will trade as a tracking stock.
Despite the separation, the four separate entities will continue to collaborate by offering each other's services or purchasing network capacity from a sister company.
The plan will create separate companies "that don't have to compete internally for capital or attention," Armstrong said. Investors will be better able to evaluate the performance of each company and compare it to its rivals, he said.
ABN Amro analyst Kevin Roe said the move would "make it easier for the Street to value the company, but I still believe operational results are more important."
AT&T STRUGGLES TO GROW REVENUES IN THIRD QUARTER
Operationally, AT&T has fallen short.
Over the past year, its business services unit stumbled, lost key customers and failed to meet growth expectations. The decline of the consumer business was fast and furious, while the wireless and cable television operations failed to keep up with the performance of many rivals, analysts said.
The new structure does not help the operational problems, it "just rearranges the deck chairs on the Titanic," said one industry executive, who declined to be identified.
AT&T's third-quarter performance highlighted its operational problems. Overall revenues grew 4 percent to $17 billion from $16.3 billion a year earlier, but weak sales in its core business and consumer units offset growth in wireless and broadband cable television services.
Business services revenues grew just 2.5 percent to $7.11 billion, well shy of AT&T's already-lowered projection of 5 percent growth. Consumer sales fell 11 percent to $4.67 billion as increased competition and price wars took a toll.
AT&T's profits, excluding one-time items, fell to $1.44 billion, or 38 cents a share, from $1.63 billion, or 50 cents a share, a year ago.
The results beat Wall Street's tempered earnings forecast of 36 cents a share, according to research firm First Call/Thomson Financial, but analysts focused on the disappointing revenues. |
