The Morphing of AT&T

By Alexander Slagle
Telecommunications Analyst, mPower

In This Story New Market Presence Déjà Vu, Sort Of After the Split

In late October, a beleaguered AT&T, one of the world's largest and most widely held companies, announced a restructuring plan to divide itself into four unique business units. Three new companies — AT&T Business, AT&T Broadband and AT&T Wireless — will trade in the public equities markets as stand-alone, asset-based common stocks. The fourth new business unit, AT&T Consumer, will be represented in the public markets by a tracking stock.

Why the change? The core reason appears to be the assumption that the public shares of the separate business units will be worth more individually than together. Many analysts question whether this restructuring plan would have even made it to the drawing board had the stock not plummeted so drastically — losing almost two-thirds of its value — since March.

minute: read this article at a glance.

Technical Terms Portfolio manager Divestiture Tracking stock

Initial investor reactions following the announcement were negative. But, given the market's recent volatility and tendency to overreact, the ultimate fate of AT&T will depend in large part on how the restructuring plan plays out.

How might this affect the mutual funds in your retirement portfolio? Some portfolio managers will sell shares of AT&T because they see the organizational challenges and competition as too great. Some mutual fund managers may increase positions in the newly created AT&T entities as the separate companies benefit from greater focus. Fortunately, mutual fund investors needn't worry about uncovering every detail of this confusing divestiture, as the fund portfolio managers are already on it.

New Market Presence

AT&T Business will be represented by the asset-based common shares currently traded on the New York Stock Exchange (NYSE) under the "T" symbol. This company, which will serve as the principal business unit, will act as parent and issuing entity of the AT&T Consumer tracking stock. New common stock will be issued for AT&T Broadband and AT&T Wireless, which currently trades as a tracking stock (ticker: AWE) and is about 15 percent publicly owned.

A tracking stock is a type of equity issued to track the performance or value of certain business units of the issuing corporation. The holder of tracking stock has the right to share in the earnings or value of that portion of the corporate issuer's earnings or assets. AT&T issued the Wireless tracking stock in April of this year to capture the recent investor desire for focused, high-growth technology stocks while maintaining the diversified corporate balance sheet desired by the debt market.

When the restructuring is complete, current AT&T shareholders will likely hold shares in all four AT&T business units. The exchange of shares will happen in the following manner: First, the company will create tracking stocks for each of the new units and exchange them for current shareholders' AT&T shares. Then, probably in the following one-year period, the tracking shares of the three companies whose shares will trade as asset-based stocks will be converted. (AT&T Consumer shares will remain as tracking stocks.)

Déjà Vu, Sort Of

AT&T has been here before, but not exactly: The company was split up in 1984 by the Justice Department, whereupon AT&T divested its regional Bell System operating companies to form seven "Baby Bells" (US West, Bell South, Ameritech, Southwestern Bell, Pacific Telesis, Bell Atlantic and NYNEX). That time, it was because of antitrust regulations. This time, the split is a result of market pressures.

The pressure on management and the board of directors to raise the stock price was clearly intense. Investors of all sizes were selling shares. They were apparently too impatient to wait for the company to accomplish its master plan — to become the leading broadband and wireless force, funding expansion into those markets with the cash flows of the consumer and business long-distance services — as a single entity. Many investors did not like the prospects for the long-distance market, regardless of the important cash flows provided by its operations (revenues have been falling and are expected to continue doing so).

The pressure on management and the board of directors to raise the stock price was clearly intense. Investors of all sizes were selling shares.

The four businesses are at drastically different stages of maturity: Two of the operations, Wireless and Broadband, are in the buildup stage, while the other two units, Consumer and Business, are done building and are busy reaping the cash flows from their buildout.

The board of directors unanimously approved the restructuring plan for several reasons:

• To separate its growth-oriented businesses (Wireless, Data, Internet and Broadband Cable) from its sluggish yet cash-flow-positive businesses (Long-distance), thereby creating greater market visibility and market value for its different business units and lifting AT&T's stock price, which has dropped by almost two-thirds from its 52-week high of $61.
• To allow each company to focus on its own line of business and react more quickly to market and customer demands.

Analysts have noted these possible negative implications of the restructuring:

• Current investors may frown over the planned decrease in overall dividends. AT&T Broadband and AT&T Wireless will not offer dividends at all; these companies will be marketed to investors for their growth potential, not their earnings per share and dividend yield.
• The separate companies may have a more difficult time bundling services and providing them in a seamless manner to customers.
• AT&T may struggle over the next two years with organizational issues, including the selection of new heads for the newly formed companies.
• The companies will likely be paying investment banks, lawyers and accountants the high fees typically incurred for a divestiture of this type.

After the Split

Here is how AT&T expects to divide its operations among the four new entities:

AT&T Business

AT&T Business will be the legal owner of the AT&T brand and will license out brand rights to the other companies. This unit will own AT&T's network and provide business-enterprise communications, including long distance and networking. AT&T Business will include the AT&T Network, AT&T Labs and the 50 percent stake in Concert, its international communications services joint venture with British Telecom. These subsidiaries will serve AT&T companies as well as non-AT&T companies under contractual arrangements. The business services unit of AT&T that will become AT&T Business reported revenue of $7.1 billion for the quarter ending September 30, 2000, a 2.5 percent increase over third quarter 1999.

AT&T Broadband

AT&T Broadband will provide video, voice and data services through broadband cable line technology. This unit was formed through AT&T's purchase of cable giants Tele-Communications Inc. in 1998 and MediaOne Group in 1999. Broadband is actually a competing technology to the AT&T Consumer unit's DSL product. Broadband revenue was $2.4 billion for the third quarter 2000, a 10.8 percent increase over the third quarter 1999.

AT&T Wireless

AT&T Wireless will provide the analog and digital wireless services, which have provided a substantial portion of the company's revenue growth during 2000. The company issued a tracking stock for the Wireless Group in April, hoping to catch some of the investor passion for high-growth stocks that has prevailed during the past few years. The Wireless Group reported revenues of $2.8 billion for the third quarter ending September 30, 2000, a whopping 36.6 percent increase over the respective quarter in 1999.

Related Reading What Every Investor Should Know about High-tech Technology Stocks and Your Portfolio

AT&T Consumer

AT&T Consumer will provide consumer long-distance services, the product that created the prominence of the AT&T brand, as well as digital subscriber lines (DSL) and dial-up Internet access. This company will be represented by a tracking stock issued by AT&T Business. AT&T's existing consumer services unit reported revenue of $4.7 billion during the third quarter of 2000, a decrease of 10.9 percent from the third quarter 1999. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

The Morphing of AT&T

By Alexander Slagle
Telecommunications Analyst, mPower

In This Story New Market Presence Déjà Vu, Sort Of After the Split

In late October, a beleaguered AT&T, one of the world's largest and most widely held companies, announced a restructuring plan to divide itself into four unique business units. Three new companies — AT&T Business, AT&T Broadband and AT&T Wireless — will trade in the public equities markets as stand-alone, asset-based common stocks. The fourth new business unit, AT&T Consumer, will be represented in the public markets by a tracking stock.

Why the change? The core reason appears to be the assumption that the public shares of the separate business units will be worth more individually than together. Many analysts question whether this restructuring plan would have even made it to the drawing board had the stock not plummeted so drastically — losing almost two-thirds of its value — since March.

minute: read this article at a glance.

Technical Terms Portfolio manager Divestiture Tracking stock

Initial investor reactions following the announcement were negative. But, given the market's recent volatility and tendency to overreact, the ultimate fate of AT&T will depend in large part on how the restructuring plan plays out.

How might this affect the mutual funds in your retirement portfolio? Some portfolio managers will sell shares of AT&T because they see the organizational challenges and competition as too great. Some mutual fund managers may increase positions in the newly created AT&T entities as the separate companies benefit from greater focus. Fortunately, mutual fund investors needn't worry about uncovering every detail of this confusing divestiture, as the fund portfolio managers are already on it.

New Market Presence

AT&T Business will be represented by the asset-based common shares currently traded on the New York Stock Exchange (NYSE) under the "T" symbol. This company, which will serve as the principal business unit, will act as parent and issuing entity of the AT&T Consumer tracking stock. New common stock will be issued for AT&T Broadband and AT&T Wireless, which currently trades as a tracking stock (ticker: AWE) and is about 15 percent publicly owned.

A tracking stock is a type of equity issued to track the performance or value of certain business units of the issuing corporation. The holder of tracking stock has the right to share in the earnings or value of that portion of the corporate issuer's earnings or assets. AT&T issued the Wireless tracking stock in April of this year to capture the recent investor desire for focused, high-growth technology stocks while maintaining the diversified corporate balance sheet desired by the debt market.

When the restructuring is complete, current AT&T shareholders will likely hold shares in all four AT&T business units. The exchange of shares will happen in the following manner: First, the company will create tracking stocks for each of the new units and exchange them for current shareholders' AT&T shares. Then, probably in the following one-year period, the tracking shares of the three companies whose shares will trade as asset-based stocks will be converted. (AT&T Consumer shares will remain as tracking stocks.)

Déjà Vu, Sort Of

AT&T has been here before, but not exactly: The company was split up in 1984 by the Justice Department, whereupon AT&T divested its regional Bell System operating companies to form seven "Baby Bells" (US West, Bell South, Ameritech, Southwestern Bell, Pacific Telesis, Bell Atlantic and NYNEX). That time, it was because of antitrust regulations. This time, the split is a result of market pressures.

The pressure on management and the board of directors to raise the stock price was clearly intense. Investors of all sizes were selling shares. They were apparently too impatient to wait for the company to accomplish its master plan — to become the leading broadband and wireless force, funding expansion into those markets with the cash flows of the consumer and business long-distance services — as a single entity. Many investors did not like the prospects for the long-distance market, regardless of the important cash flows provided by its operations (revenues have been falling and are expected to continue doing so).

The pressure on management and the board of directors to raise the stock price was clearly intense. Investors of all sizes were selling shares.

The four businesses are at drastically different stages of maturity: Two of the operations, Wireless and Broadband, are in the buildup stage, while the other two units, Consumer and Business, are done building and are busy reaping the cash flows from their buildout.

The board of directors unanimously approved the restructuring plan for several reasons:

• To separate its growth-oriented businesses (Wireless, Data, Internet and Broadband Cable) from its sluggish yet cash-flow-positive businesses (Long-distance), thereby creating greater market visibility and market value for its different business units and lifting AT&T's stock price, which has dropped by almost two-thirds from its 52-week high of $61.
• To allow each company to focus on its own line of business and react more quickly to market and customer demands.

Analysts have noted these possible negative implications of the restructuring:

• Current investors may frown over the planned decrease in overall dividends. AT&T Broadband and AT&T Wireless will not offer dividends at all; these companies will be marketed to investors for their growth potential, not their earnings per share and dividend yield.
• The separate companies may have a more difficult time bundling services and providing them in a seamless manner to customers.
• AT&T may struggle over the next two years with organizational issues, including the selection of new heads for the newly formed companies.
• The companies will likely be paying investment banks, lawyers and accountants the high fees typically incurred for a divestiture of this type.

After the Split

Here is how AT&T expects to divide its operations among the four new entities:

AT&T Business

AT&T Business will be the legal owner of the AT&T brand and will license out brand rights to the other companies. This unit will own AT&T's network and provide business-enterprise communications, including long distance and networking. AT&T Business will include the AT&T Network, AT&T Labs and the 50 percent stake in Concert, its international communications services joint venture with British Telecom. These subsidiaries will serve AT&T companies as well as non-AT&T companies under contractual arrangements. The business services unit of AT&T that will become AT&T Business reported revenue of $7.1 billion for the quarter ending September 30, 2000, a 2.5 percent increase over third quarter 1999.

AT&T Broadband

AT&T Broadband will provide video, voice and data services through broadband cable line technology. This unit was formed through AT&T's purchase of cable giants Tele-Communications Inc. in 1998 and MediaOne Group in 1999. Broadband is actually a competing technology to the AT&T Consumer unit's DSL product. Broadband revenue was $2.4 billion for the third quarter 2000, a 10.8 percent increase over the third quarter 1999.

AT&T Wireless

AT&T Wireless will provide the analog and digital wireless services, which have provided a substantial portion of the company's revenue growth during 2000. The company issued a tracking stock for the Wireless Group in April, hoping to catch some of the investor passion for high-growth stocks that has prevailed during the past few years. The Wireless Group reported revenues of $2.8 billion for the third quarter ending September 30, 2000, a whopping 36.6 percent increase over the respective quarter in 1999.

Related Reading What Every Investor Should Know about High-tech Technology Stocks and Your Portfolio

AT&T Consumer

AT&T Consumer will provide consumer long-distance services, the product that created the prominence of the AT&T brand, as well as digital subscriber lines (DSL) and dial-up Internet access. This company will be represented by a tracking stock issued by AT&T Business. AT&T's existing consumer services unit reported revenue of $4.7 billion during the third quarter of 2000, a decrease of 10.9 percent from the third quarter 1999. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.