SMARTMONEY.COM: An AWEfully Big
Disappointment
By CINTRA SCOTT
NEW YORK -- A company's initial public offering doesn't usually cost its
employees. But the approximately 56,000 AT&T (T) staffers who ponied up
for a total of 36 million shares of AT&T Wireless Group (AWE) are surely
miffed.
When they bought shares in the largest IPO in U.S. history three weeks ago,
it looked as if they were getting a bargain on a growth stock in an exploding
area. But now the stock has sagged below its offering price of $29.50, and
underperformed the Dow Jones Industrial Average, the S&P 500 and the
Nasdaq composite. AT&T's CEO has been trying to boost morale in the
face of T's and AWE's poor showings.
'Don't let the short-term market reaction distract you,' wrote C. Michael
Armstrong in a letter to employees, as quoted by The Wall Street Journal last
week.
Easy for him to say. The tracking stock was supposed to unlock the market
potential of this fast-growing AT&T subsidiary - and raise money in the
process. To that end, AWE was packaged and painstakingly priced with the
help of 17 leading investment banks. So why aren't potential investors buying
in? A combination of factors, including concerns about the company's choice
of technology, the structure of the stock offering itself and the overall
malaise of tracking stocks in general during their first few months. To
understand why AWE has tripped up just past the starting gate, we looked at
the stock's brief trading history. And the last three weeks don't paint a pretty
picture.
Let's start at the beginning. On April 27, the 360 million-share IPO raised
$10.3 billion dollars. Of the IPO proceeds, $3.3 billion went into AT&T's
coffers while $7.0 billion went to AT&T Wireless Group to expand its
network and pursue acquisitions. Those 360 million shares represented a
15.6% stake in the wireless service provider.
Things looked good. On its first day of trading the stock rose 8% to $31.81.
But 4 days later, on May 1, the stock took its first hit via a column by tech
guru George Gilder (and his colleague Richard Vigilante). Gilder, author of
the influential Gilder Technology Report, wrote in the Journal that AT&T
Wireless was 'the epitome of an antitechnology high-tech company.' Why?
Because the company is resisting Code Division Multiple Access (CDMA),
a wireless technology which Gilder believes 'could restore America to
wireless leadership in the Internet age.'
Instead, AT&T wireless promotes Time Division Multiple Access, or
TDMA, a wireless technology Gilder says is 'essentially worthless for
wireless data.' In other words, TDMA isn't ideal for the next new thing, the
wireless Internet. The pointed article, titled 'AT&T Wireless Debacle,'
proclaimed that 'For AT&T, the worst is yet to come.'
Bah humbug.
The next day, May 2, AT&T announced that the offering had closed. A total
of 360 million shares were sol$ - 306 million domestically and 54 million
abroad. But savvy investors may have noticed that the IPO underwriters did
not purchase any additional shares, per their 'overallotment option.' And,
according to the IPO filing with the Securities and Exchange Commission, up
to 54 million more shares were available for purchase if underwriters wanted
them. But the underwriters - all 17 of them - decided it was an offer they
could refuse.
That's not exactly a bullish sign. After all, successful IPOs regularly see their
bankers exercising their overallotment options. And their press releases
regularly boast about it. That's because IPOs are traditionally priced on the
low side in order to reward early investors with a premium in trading.
(Successful underpricing keeps IPOs in demand, and provides an early
investor base for a stock's trading life.) So, wouldn't a bank want to cash in
on an underpriced IPO itself? The answer to that question should give
investors pause.
Once the deal was officially closed, a flood of research on the new stock
appeared that same day. ABM-AMRO, Banc of America Securities, Credit
Suisse First Boston, Goldman Sachs, Lehman Brothers, Merrill Lynch,
PaineWebber, Prudential, Salomon Smith Barney and Warburg Dillon Read
all initiated coverage of the stock with the exact same rating: Buy. That
means the three lead managers of the deal - Goldman, Merrill and Salomon -
recommended the stock for others, but chose not to follow their own advice.
Hmmm.
According to Zacks Research, of the 12 brokerages now covering the stock,
only one doesn't have some form of Buy rating on it. CIBC WorldMarkets,
which wasn't involved in the lucrative underwriting of the stock, has the
stock rated Hold.
CIBC analyst Harvey Liu's concerns include the company's use of TDMA
instead of CDMA (just like Gilder) and the substantial spending necessary to
expand its network. Liu is also troubled that AT&T Wireless is still under
AT&T's control. That means if something bad happens to AT&T, AT&T
Wireless gets hit too. And guess what? That's what happened when AT&T
lowered its earnings outlook for the year on May 2, citing erosion in
long-distance profits. In the trading session immediately following the
forecast, AT&T dropped 14% to $41.88, while AT&T Wireless dropped 9%
to $32.25.
All this doesn't mean AWE is behaving much differently from other tracking
stocks. It's typical for tracking stocks to underperform the market in their
first month of trading, according to Lehman Brothers' Barbara Byrne, a
renowned tracking-stock expert who worked on the very first tracking-stock
deal for General Electric (GE) 16 years ago. But Byrne has also found
tracking stocks outperform their peers after six months of trading. Sprint's
(FON) incredibly successful wireless tracking stock, PCS (PCS), got off to a
rocky start back in November of 1998. But early investors can hardly
complain now. The stock is up almost 500% since then.
Will AWE mimic PCS's success? Looking ahead, AT&T reiterated this
week (in its quarterly report) that it intends to distribute the 84.4% of AT&T
Wireless not currently trading in the second half of the year. AT&T
shareholders are expecting to receive at least some of those shares, but the
company also said it might hold another public offering.
Will investors want part of the new action? With its first public offering
trading underwater, who could blame them for being wary?
For more information and analysis of companies and mutual funds, visit
SmartMoney.com at smartmoney.com
Briefing Book for: AWE | FON | GE | PCS | T |
