AT&T’s Restructuring Plans

N E W  Y O R K, Oct. 25, 2000 -- The massive AT&T corporation will split up into four smaller, publicly traded companies by 2002, the telecommunications giant confirmed today, a move that essentially dismantles three years of acquisitions by the largest U.S. long-distance telephone and cable television company.

The announcement is a bold restructuring move by the corporation, and the first since creating the “baby bells” in 1984. The four new companies will be AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer.

Two of the four new companies will represent the core of a new AT&T — the business unit that runs the company’s hugetelecommunications network and serves business customers, and aseparately traded subsidiary containing the shrinking consumerlong-distance business.

As separate stocks, investors will be able to track thegrowth or decline of each unit instead of trying to value theentire conglomerate with its disparate parts.

Meanwhile, long-distance customers will likely see little impact from AT&T’s restructuring, analysts said. The regional Baby Bell phone companies probably will not follow AT&T’s lead in restructuring since they lacked its range of services, the analysts added.

Wall Street Reacts Coolly

On the New York Stock Exchange, AT&T, which beat third-quarter earnings expectations today, finished down $3.63, or 13.3 percent, at $23.56, after stock downgrades from several Wall Street analysts, including Salomon Smith Barney’s Jack Grubman, one of Wall Street’s most influential analysts. He downgraded AT&T’s stock to “neutral” from “outperform,” saying, “We believe the businessis melting down.”

And Grubman is not the only analyst reacting less than enthusiastically to the restructuring plan.

“I think it’s the beginning of the end of an icon. It’s asad day in corporate history. It’s the surrender to WallStreet, which was foolishly looking for near-term results andstock gains on a five- to 10-year turnaround project,” saidGartner Group analyst Ken McGee.

“They are going to have to prove that this restructuring isgoing to put the company on the right track,” said StanleyNabi, vice chairman at DLJ Asset Management, with $35 billionunder management. “When a company has an operation that islosing money, and they sell it, they write of it off. Here, allthey are doing is reshuffling the deck.”

ABN Amro analyst Kevin Roe said the move would “make iteasier for the Street to value the company, but I still believeoperational results are more important.”

A union also is calling AT&T’s reorganization plan flawed.

The Communications Workers of America union said the new plan won’t fix the operational problems at the company. “AT&T has operational problems which cannot be fixed with financial restructuring,” said the union, which representsabout 35,000 AT&T employees, or about 20 percent of thecompany’s workforce.

CEO Armstrong Defends Move

In announcing the change of course, AT&T Chairman C. Michael Armstrong tried to allay fears of both investors and employees, insisting the changesdidn’t amount to a contradiction of the one-stop shopping strategy.

“Each of these new companies will move faster in meetingcustomer needs, but they’ll serve them under one of the world’smost recognized and respected brands and they’ll still be able tooffer bundled services through inter-company agreements,” he saidin a statement.

Under the plan, shareholders of AT&T, the fourth most widelyowned stock in the country, will exchange their stock for shares ineach of the new businesses.

But in a move that may not sit well with AT&T’s large base ofindividual investors who have owned the stock for decades, thecompany said the combined dividend paid by the four stocks isexpected to be “substantially less” than the current annualpayment of 88 cents per AT&T share. Based on AT&T’s beaten-downstock price, that dividend amounts to a cash investment return ofmore than 3 percent per year, an unusually high yield for a majorcompany.

A Repudiation of Strategy?

The restructuring plan marks a radical about-face from the guiding philosophies preached by management since the arrival of Armstrong in late 1997.

But Armstrong today disagreed sharply with characterizations of the new plan.

It “seems to be a lot of fun to write that this is areversal or a repudiation of our strategy. I find that not onlywrong, but offensive,” Armstrong saidin a meeting with analysts.

“After 30 to 40 companies being integrated and the tens ofmillion of dollars of investment in ourselves, to suggest thatthis phase of the transformation is some kind of repudiation — I just don’t buy into it...the journey hasn’t been simple, butI think the outcome is going to be very successful,” Armstrongsaid.

Back in 1997, with falling prices eating away at its core long-distancebusiness, Armstrong embarked on a radical overhaul of the companythat envisioned AT&T as a hub for telephone, television andInternet services.

The strategy included a foray back into the local phone businessAT&T had left when it spun off the Baby Bells in 1984. However,Armstrong was determined that AT&T needed to acquire its own directconnections with the nation’s homes and businesses rather than paythe Baby Bells to use their phone lines.

AT&T thus plunked down stock then worth more than $100 billion to buy two of the nation’s four largest cable TV companies, Tele-Communications Inc. and MediaOne Group.

At first, Wall Street cheered the new approach. But then it became apparent long-distance prices were falling faster than expected, undermining AT&T’s revenue projections and slowing the flow of revenue needed to upgrade thecable systems for two-way communications. Compounding matters,AT&T’s promising business services unit was failing to meet itsgrowth projections. AT&T’s stock fell like a rock over the next six months.

The Original BreakToday’s breakup is the third major restructuring for the formernational telephone monopoly since 1984’s court-ordered breakup,when AT&T spun off its local calling operations as seven BabyBells, several of which have since merged.

Twelve years later, in 1996, AT&T voluntarily split itself intothree separate companies, spinning off its communications equipmentarm and acclaimed Bell Labs research unit as Lucent TechnologiesInc., and its computer division as NCR Corp.

At last count, AT&T had 163,600 employees, nearly a third ofwhom work in the cable “broadband” division. That compares with awhopping payroll of 964,000 people before the 1984 breakup, whichleft AT&T with 373,000 workers. In 1996, more than half of thecompany’s 300,000 workers departed with Lucent or NCR.

ABCNEWS Radio, the Associated Press and Reuters contributed to this report.