Ma Bell Calls It Splits

AT&T;'s top brass tried to keep things upbeat at last week's press conference--called to announce that one of America's oldest and most revered institutions was splitting into four companies. AT&T; CEO Michael Armstrong told a roomful of reporters that his own aunt could still sleep easily putting her money in Ma Bell and living off the dividends. Lower-level Bellheads even joked about the career opportunities the split would create. "You always wanted to run your own company," one quipped to another. "Now you're going to get the chance."

But Wall Street wasn't smiling at this cheerful admission that Armstrong's strategy to turn Ma Bell into a vertically integrated communications giant had failed utterly. After last Wednesday's announcement, AT&T; stock plunged 13%, to its lowest level in a decade. And it tumbled 5.5% more by week's end. David Lefkowitz, an analyst at Credit Suisse Asset Management, had some different advice for Armstrong's aunt, saying that AT&T; stock is "probably dead money for some time." Salomon Smith Barney analyst Jack Grubman downgraded the stock for the second time in two weeks and declared it to be "melting down."

The new plan calls for Ma Bell to be divided into four distinct companies: AT&T; Business Services, AT&T; Consumer Services, AT&T; Broadband and AT&T; Wireless. That's a lot of slicing and dicing, but it gets even more complicated. Some of the new companies will start off as "tracking stocks," meaning they're independent in name only. AT&T; Business will become the parent of AT&T; Consumer. And the whole thing will take two years to happen.

The driving force behind the breakup is AT&T;'s conviction that at current valuations the parts are worth more than the whole. The official line is that the smaller, nimbler companies will be more profitable independently. "With their own resources and asset-based stock they can shape their own destiny and future," says Armstrong. But the plan also reflects AT&T;'s frustration that investors have been so focused on its evaporating long-distance business. The split is designed to force Wall Street to pay more attention to faster-growing parts of the company.

The new direction comes at a dark time for Ma Bell. Since its founding in 1885 as the long-distance arm of the American Bell Telephone Co., AT&T; has held a privileged position in the U.S. economy. With its control of the nation's phone grid, it was largely insulated from competition. That deprived consumers of choice. ("We don't care," Lily Tomlin's Ernestine the Operator used to explain. "We don't have to. We're the phone company.") It also made the company's stock such a sound investment that it became famous as the stock of choice for widows and orphans. Indeed, AT&T; has 4.2 million shareholders.

But AT&T;'s core businesses have been in an accelerating decline. In 1984 a federal antitrust ruling forced AT&T; to spin off its lucrative local phone operations, now the Baby Bells. More recently, stiff competition from WorldCom, Sprint, the Baby Bells and wireless has been driving the profit out of the long-distance business--which still accounts for as much as 65% of AT&T;'s more than $62 billion in revenue. Ma Bell, which had been charging 15[cents] a minute for calls, suddenly found itself competing with rates as low as 4[cents] a minute. In this year's third quarter, AT&T;'s profits fell 19.4% from a year ago, to $1.3 billion.

In his three years at the helm, Armstrong, 62, has tried to shift AT&T; into new and more lucrative areas. He moved aggressively into cable, plunking down $115 billion to build the nation's biggest cable network. Armstrong has also pushed into fast-growing areas like wireless and has tried to turn AT&T;'s WorldNet into a rival of AOL's. The ultimate vision was that Ma Bell would clean up by cross-selling its 80 million customers a bundle of telephone, cable and Internet services.

But so far, AT&T; has found bundling a humbling experience. It has been slow to deliver the package of services that can provide consumers with one-stop shopping. And consumers haven't shown any great preference for having a single provider, and a single bill, for all their communications needs. Fewer than 10% of AT&T; customers receive bundled services. Curiously, consumers will still be able to get bundled services post-breakup.

Critics see the breakup as a capitulation to investor pressure to get the stock price up at any cost. Armstrong tried gamely last week to present it as consistent with his previous efforts. "Structure serves strategy, and at least in my view, our strategy has been consistent," he said. But not everyone was buying it. "AT&T; made a big deal about creating an integrated communications company selling bundled services," says Salomon Smith Barney's Grubman. "That is being abandoned after less than two years of trying."

Wall Street, which generally loves divestitures, has not found a lot to like in AT&T;'s breakup plan. For starters, it's very hard to figure out just what is going to happen over the next two years. And confusion is a big negative in the risk-averse investment world. There's also grumbling that the various spin-offs and tracking stocks will mean endless--and endlessly expensive--work by investment bankers and lawyers.