NEW YORK-Even if telecommunications giants seeking to combine with each other clear the myriad hurdles confronting their plans, the success of their bids to merge may depend ultimately on approval by the little guy.
Holding what may be the ultimate trump card is the holder of common stock, who expects dividends, sees some mergers as expensive and views as cheap the talk about their long-term benefits, commented James A. Ferency. Ferency is senior managing director of Bear, Stearns & Co. Inc. speaking at a Practising Law Institute conference on “Telecommunications Mergers & Acquisitions.”
AT&T Corp. has “received closer market scrutiny” and experienced “significant dislocations in its stock, a 15-percent decline” since it announced June 24 its plan to acquire Tele-Communications Inc., Ferency said July 13.
Also on July 13, several wire services excerpted a Broadcasting & Cable magazine article, which quoted TCI Chairman John Malone as saying that AT&T’s falling share price “could well kill” the proposed merger.
By the close of trading July 14, AT&T’s stock had rebounded somewhat to $57.50 per share, but it was well below its 52-week high of $68.50.
No stock up-ticks
The proposed merger of SBC Communications Inc. and Ameritech Corp. also “has fallen flat in the marketplace, and I’m not sure they can get it done. There’s also the regulatory risk,” Ferency said.
“There’s not yet been an up-tick (in the companies’ stocks) to reflect the cost savings and revenue increase potential. What the market is saying is that this is not like the Bell Atlantic (Corp.) – Nynex (Corp.) merger, which was a horizontal integration of contiguous players with lots of (up-front) cost savings.”
To answer the concerns of traditional common stock investors, AT&T proposed during its TCI acquisition announcement a plan to create different classes of equity that track the performance of specific lines of its business-from the more staid, dividend-paying lines to the more entrepreneurial segments that likely would be most attractive to less risk-averse investors.
“The rapid-growth segment without near-term earnings should have a different valuation and appeal to different investors. At least there now is a sub-sector of investors who have embraced discounted cash flow,” Ferency said.
“If AT&T succeeds, it will break the ice in terms of valuation, but [things] will be static and kind of ugly for a while until AT&T reconfigures its investor base.”
In the wire service excerpts of the Broadcasting & Cable magazine interview with Malone, TCI’s chairman is quoted as saying: “It was a mistake not to have fully worked out the details of the tracking stock so it could be disclosed at the same time (as the merger announcement)-absolutely a mistake, in my opinion.”
Tracking-stock trials
However, working out the details of tracking stocks is no guarantee of their success in wooing investors, as Telephone and Data Systems Corp. discovered. Citing “adverse market conditions,” TDS announced June 12 it was withdrawing its plan to sell 13.5 million shares of stock that would track the performance of TDS Telecommunications Group, its local exchange carrier business.
Despite the recent difficulties encountered by the proposed AT&T-TCI and SBC-Ameritech mergers, Ferency said he doesn’t expect the flow of such transactions in telecommunications to slow anytime soon.
While much of the recent domestic activity has involved pairings of American companies, the next 18 months are likely to reveal at least one European-American telecommunications carrier merger proposal, he said. On the lookout for such possibilities are major European telecommunications services providers like British Telecommunications plc, Cable & Wireless plc, Deutsche Telekom and France Telecom.
“The challenges from a tax, regulatory, political, corporate governance, (etc.) standpoint are daunting, and I’m not sure anyone has cracked the code yet,” Ferency said.
“But we have seen a lot of dialogue. It’s an exciting time frame. We (Bear, Stearns) are fully engaged … (These transactions) will provide a lot of employment opportunities for the [lawyers] in this room.”
