SV News Service
In the most dramatic move since it was forced to shed the six Baby Bell companies in 1984, AT&T announced it will break itself up, this time creating four new companies.
The new companies will focus on consumer, business, broadband and wireless communications services. Each unit will focus products and services for their respective target market. Despite the separation, the four separate entities will continue to collaborate by offering each other’s services or purchasing network capacity from a sister company.
Much like the break-up of Hewlett-Packard, the AT&T move was prompted by the difference in financial performance between key business units with one or more units dragging on the sales and earnings performance of the overall company. That in turn is dragging down AT&T’s stock. AT&T’s third-quarter sales rose just four percent to $ 17 billion. Weak sales in its core business and consumer units offset growth in wireless and broadband cable television services. AT&T’s profits fell to $ 1.44 billion from $ 1.63 billion a year ago. Price wars and increased competition in the long distance telephone market erased much of AT&T’s gains in the business services unit.
As HP has shown, once liberated, even the less business units end up performing much stronger as they can be more focused and have more leverage to make the necessary sales, marketing and product development moves. As a result, HP shareholders have greatly benefited from the split.
The initial reaction from AT&T shareholders was negative, as they sent AT&T shares down 14% on the announcement.
Analysts said shareholders will benefit in the long run as they will be able to track the growth or decline of each unit instead of trying to value the entire conglomerate.
Others expressed disappointment saying the break-up torpedoes the company’s effort to become a single huge communications conglomerate offering local, long-distance, wireless telephone and Internet access services. The company has invested some $100 billion during the past three years in realizing that goal, including the $60 billion acquisition of the TCI, America’s largest cable TV company. “I think it’s the beginning of the end of an icon. It’s a sad day in corporate history. It’s the surrender to Wall Street, which was foolishly looking for near-term results and stock gains,” said Gartner Group analyst Ken McGee.
Michael Armstrong, Chairman, AT&T dismissed the criticism, calling the break-up logical and necessary. “The reorganization is not a short-term financial engineering step at all. This phase of our future needed to be addressed. This was done for very fundamental and strategic reasons. After integrating 30 to 40 companies tens of million of dollars of investment in ourselves, to suggest that this phase of the transformation is some kind of repudiation, I just don’t buy into it. The journey hasn’t been simple, but I think the outcome is going to be very successful.”
AT&T’s wireless and broadband cable television businesses will trade as independent stocks. The basic AT&T entity will consist of the company’s business-services unit, to be known as AT&T Business. It will provide communications and networking services to corporate customers. It will trade on the New York Stock Exchange under the company’s existing “T” stock symbol.
It will also be the legal owner of the AT&T brand, which it will license to the other companies. AT&T business will also be the parent company of the AT&T Consumer business.