Deals! Deals! Deals!
Thank goodness we are finally moving away from the ugly earnings warning paranoia of the past few weeks and focusing on a more exciting subject area: Deals!
Let’s talk about three of them making the markets move right now.
Ma Bell Breaks Up … Again?
First, AT&T. It’s break-up for Ma Bell again. Just this morning, AT&T has announced it’s splitting into perhaps as many as four companies.
Why? Well, how about the stock has gone from $61 to the mid $20s! Let’s face it, C. Michael Armstrong, nice guy and all, a real leader, but his strategy of building ATT up into a multi-faceted behemoth didn’t work.
ATT now has (at least) four major business segments and they really don’t fit together. Here’s what’s up. The wireless biz was already given a tracking stock (AWE). This will get completely spun out. So will T’s cable biz (Did you know AT&T was the biggest cable company in the country?).
The consumer long distance business is the big problem of course. In short it is a deteriorating biz. Competition is killing it. What competition you ask? Well, in the beginning ATT was a monopoly. Then you had MCI. Then Sprint. Now all the Baby Bells, Verizon and such, are getting into long distance biz.
Now think broader. How about wireless? Every time someone makes a call using Omnipoint, that’s $ out of ATT’s pocket. Broaden again. How about the Internet? I e-mail my brother in Singapore, that’s a $45 phone call I just didn’t make. Of course there are free Internet phone services too. As John Chambers, CEO of Cisco told me recently: “Voice will be free.” (An add-on to other services.)
Still AT&T’s long distance biz is a real cash cow and as one Wall Streeter told me, “It’s not tobacco or asbestos. It’s a real business.” That business will likely become a tracking stock.
The core AT&T will become the company’s data network, a very valuable and profitable business. (But not too sexy)
Good for Investors
Here’s what a wired-in fund manager told me about the deal: Cable king John Malone was pushing for a break-up. Resisting were board members Armstrong and Citigroup CEO Sandy Weill. The latter two eventually gave in. The structure of the new pieces will be determined by complex tax factors.
Folks in Basking Ridge, N.J., (T’s HQ) are right now preparing for this, delineating businesses and such. A breakup value of the company gets you in the high $30s (at least.) Why not $60, which is where the stock was before? Because the company has made some costly acquisitions since it hit that price.
Let’s look at history. AT&T break-ups has been very good for shareholders. In 1984, the government broke up ATT into seven RBOCs, or regional Bell operating companies. It was a bonanza for shareolders.
In 1996, AT&T spun off Lucent and NCR. LU’s recent problems notwithstanding, that was also a boon to shareholders. ($245 billion of market value here folks. In fact, the only two major telcos not from AT&T, of course, are MCI/Worldcom and Sprint.)
This next AT&T deal? Though some analysts are skeptical, I think it will be more good news for T shareholders.
Jack Welch Jumps In
Second, General Electric. This is a real 1980s, “Barbarians at the Gate”-like drama. It goes like this:
GE looks at Honeywell. Drops idea of buying them. Then United Technologies steps up to plate. Offers $40 billion to buy Honey. GE CEO Jack Welch hears about deal on Friday. Gets peeved. Submits $45 billion bid to Honeywell board — as they are meeting to accept UTX bid! Welch breaks up UTX deal. GE gets Honeywell. HON jumps to $50 a share. GE slips from $55 to $49. Welch is accused of delaying retirement. Says he’ll “bust someone in the chops,” if they say that. (Come and get me Jack!)
Bottom line: GE stock is down because Honeywell is a mess. (By the way, GE has over $110 billion in sales, Honeywell about $20 billion.) And HON is more cyclical than GE. As for regulatory hurdles, shouldn’t be a problem, this is truly a global business.
For GE shareholders, what’s not to like? You get Welch (best CEO in the world) for another year, plus now he’s mad because people think that he blew it and the stock’s down. Sounds like a good combo to me!!!
Time-Warner/AOL Inches Along
Third, AOL/Time Warner. No news is good news for this deal, I guess. TWX CEO Jerry Levin says he still expects the deal to close this Fall. (Hey Jerry, we’re running out of Fall!)
Levin says the shareholders have approved it. The cable franchises have approved it. The anti-business European regulators have approved it. (Of course TWX had to kill its deal to buy EMI — that may be a good thing!) We expect the (more pro-business) U.S. regulators to approve it. Sorta puts the squeeze on the U.S. regulators, right? We’ll see if the Feds make AOL do something about instant messaging.
One funny turn. In January when the deal was announced everyone was wondering why a cool dot.com company like AOL would want to buy an old economy company like Time Warner. Now in October, people are wondering why a healthy media company like Time Warner would want to merge.
As the worm turns!
Andrew E. Serwer is editor at large for Fortune magazine, where he originated and writes for the “Street Life” column. He’s also a regular commentator on National Public Radio’s nationally syndicated “Marketplace” program, has appeared on CNBC, CNNfn, Voice of America and PBS, and has published articles in TIME, Sports Illustrated and SLAM. For more, go to “Street Life” on Fortune.com.