AT&T Corp.’s decision to break the company up into four new businesses is a move that chairman and CEO C. Michael Armstrong said is a logical and necessary step in the transformation of the company.
The new companies will be called AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer, Armstrong said in a conference call Wednesday in which the company also announced third-quarter financial results.
AT&T’s plans, which were first reported on Monday, are aimed at creating a “foundation” on which the company can increase in value, Armstrong said. But they have also been criticized for leaving the appearance that the company simply is trying to please shareholders, a charge that Armstrong refuted.
“We believe that we have announced the foundation and the path for the creation long-term of shareholder value and will enable these companies to be even more performance, market and customer focused, faster in their response and more competitive in their offerings,” Armstrong said. “I hope to dispel the myth that it’s for any short-term purpose or for any lack of operational execution as some like to suggest. Fundamentally, it’s not only the next logical step, but the next necessary step in the transformation of this company.”
AT&T’s investments over the past two-and-a-half years have been in the areas of its business that have been growing: wireless, broadband and in business services, Armstrong said. The wireless division signed up 750,000 new customers in the third quarter, while the number of high-speed data customers totaled 880,000 in the quarter, and the number of digital television subscribers totaled 2.5 million, he said.
But long distance, which in January 1998 comprised 82 percent of AT&T’s revenue, is “neither durable or sustainable,” Armstrong said. Revenue from consumer long distance dropped an expected 10.8 per cent in the quarter, Armstrong said. By the end of this year long distance will be 60 per cent to 65 per cent of revenue, dropping into the 50-per cent range next year and to 35 per cent or less of the four companies’ revenue by 2002.
Under the plan, by 2002 AT&T Wireless and AT&T Broadband, representing the company’s wireless interests and its cable television interests (including the Excite@Home Internet access service) respectively – would trade as independent common stocks. AT&T Consumer, which includes the residential long-distance and WorldNet businesses, will be represented by a tracking stock, leaving the company’s business services, AT&T Business, as its principal unit.
Armstrong also noted that the company’s research and development laboratory will be part of AT&T Business, and all of the new businesses will have access to the technology, intellectual property and patents that originate there.
AT&T’s board of directors approved the decision unanimously, and the company intends to file its exchange proposal with the U.S. Securities and Exchange Commission in the fourth quarter of 2000. It plans to spin off AT&T Wireless as a publicly traded company next summer, and to have an IPO for a tracking stock in AT&T Broadband within the same timeframe. That tracking stock is intended to become an asset-based common stock within 12 months of the IPO.
Armstrong said he and other AT&T executives met with U.S. Federal Communications Commission Chairman William Kennard on Tuesday to discuss regulatory aspects of the breakup, and he described Kennard as “understanding.”
Establishing the four companies follows an investment phase in which AT&T brought together the assets of many companies, including the major acquisitions of cable access companies MediaOne Group Inc. and Tele-Communications Inc., over the last two years. Armstrong said the new companies are intended to be more responsive to customer needs, while still providing the benefits of one-stop shopping and bundled services through inter-company agreements.
As examples of this, AT&T confirmed that AT&T Business customers would still be able to get bundled AT&T Wireless services, and that AT&T Business services would still be provided over AT&T Broadband’s cable systems. Long-term commercial contracts will tie the wireless, broadband and consumer companies into buying their services from AT&T Business.
Analysts who see the move as a tactic designed largely to please stockholders said it highlights growth in AT&T’s wireless and broadband businesses.
“The real essence of this entire move is to try to isolate the consumer division because they understand that it’s prospects are not seen in a positive light,” said Jeff Moore, senior analyst for network services with Current Analysis Inc. in Sterling, Virginia.
AT&T business service revenue in the third quarter rose about 2.5 per cent from the same quarter last year, while consumer service revenue is down about 10.9 per cent in the quarter compared with the third quarter in 1999.
Moore said that pointing the finger at the decline in long distance is misleading because consumer service revenue, which is largely from long distance, was only 28 per cent of overall revenue in the third quarter. The company is much more strongly vested in business services, including frame relay, VPN (virtual private networks) data transmission services and dedicated lines, and those are still growth markets, Moore said. Even though there has been a decline in long distance margins, that’s largely offset by increases in those other businesses.
“I think AT&T is overreacting to the decline in its share price,” Moore said of the move to establish four companies. “They have seen their share value decline precipitously in recent months, and this is a ‘Hail Mary’ to try to reverse that trend. AT&T is out of good ideas, and this is what they came up with.”
AT&T stock was trading at about $23 on Wednesday afternoon, down from a 12-month high of $61, and down 13 per cent compared to Tuesday’s close.
Jeffrey Kagan, an independent telecom industry analyst and commentator, said in e-mail regarding AT&T’s announcement that the success of the company’s move will be its ability to stitch together services from the different companies and create the unified bundling experience promised to customers.
“AT&T needs to make sure they don’t negatively impact the customers experience,” Kagan wrote. “Customers don’t care about the same thing investors do.”
AT&T has spent the last few years selling the concept of one-stop shopping and now they have to find a way to deliver on that promise as separate companies, Kagan added. If the customer sees this is as just a behind-the-scenes restructuring, and if they can still get everything with one call and on one bill, this restructuring could work, Kagan wrote.
Moore said AT&T’s plan to keep its brand name on all the companies was a plus, but he said there could be some confusion if one of the companies is providing long distance, while the other is providing the access to the network, and he wondered whether down the road the companies might be competing with one another.
AT&T, in Basking Ridge, N.J., can be reached at http://www.att.com/.
