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: