AT&T Wireless Services Inc. could have a more difficult time offering bundled services to its customers after the business unit is separated from the parent group, according to one analyst.
Now that AT&T has announced it will create four separate companies, each operating under the AT&T brand, its one-stop-shopping benefit may be lost.
AT&T last week said it would split into four groups, with each becoming a publicly held entity trading as a common stock or tracking stock.
The four companies will be AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer. Upon the expected completion of the plan in 2002, AT&T Wireless and AT&T Broadband will be represented by independent, asset-based common stocks. AT&T Consumer will be represented by a tracking stock, and AT&T’s principal unit will be AT&T Business, the company said.
The news was met by mixed reactions. On Wall Street, many financial analysts saw the split as a sign of AT&T’s weakness and unwillingness to ride out the bumps in the short term in favor of long-term growth. The company’s stock reflected the disdain, dropping 9 percent immediately following the news and slipping even further in the following days. Shares of AT&T closed Friday at $22, up 19 cents from the previous day’s close.
Investors wavered between disdain and delight. On one hand, the separate units could pay a lower combined dividend than the intact company does now, but as separate stocks, investors will be able to track the growth of each unit as an individual entity instead of estimating the value of the entire company based on the performance of its parts.
“Share owners should get the full value of their investment because investors will be better able to evaluate the financial performance of each AT&T company and compare it to its competitors,” said AT&T Chairman and Chief Executive Officer C. Michael Armstrong.
Other analysts believe AT&T could have chosen another, less drastic, direction to get the struggling company back on its feet.
Paul Waadevig, analyst with research firm Frost & Sullivan, thinks the divestiture leaves the units vulnerable to acquisition. A change in management or issuing a tracking stock for its research and development unit could have netted positive results while creating much smaller waves.
“I think they could have done the same thing by doing something besides this. The people who are in senior management, their vision was formed before the first divestiture in ’84. Those managers are still going to be the ones who are in charge of those four entities. We’ll be getting the same attitude. Some of the nimbleness could have been accomplished … by getting some fresh blood. The divestiture is not necessarily going to make then more nimble,” Waadevig said.
When AT&T entered the wireless business with its 1994 acquisition of McCaw Cellular Communications Inc., the company pledged to keep its wireless unit as spirited as it was under McCaw. However, AT&T eventually lost many of its McCaw executives. In several instances, high-level execs have gone back to work for one of Craig McCaw’s ventures.
The split also cripples AT&T’s ability to bundle services, which for some time was a selling point for the company.
“Any bundling done is going to be done in spite of the fact that there are four companies, not because of it,” said Waadevig. “This doesn’t enable bundling at all.”
AT&T has said the four entities will offer bundled products through inter-company agreements, which essentially means the AT&T consumer will be supporting the other companies. Waadevig explained the boards of directors of each company will be loyal to their shareholders, making it difficult to imagine these agreements will allow fair market pricing.
“The other entities will be forced to, in effect, subsidize the consumer group by paying higher wholesale prices than if the consumer group was internal,” said Waadevig.
In Washington, the Federal Communications Commission took a cautious stance. FCC Chairman William Kennard said he will closely question the company about the announcement and insist that consumers’ interests are protected.
The Communications Workers of America also expressed concern over the announcement, saying, “AT&T has operational problems which cannot be fixed with financial restructuring.” AT&T is further jeopardizing network reliability by its plan to cut about 1,000 jobs-mostly technicians and support workers who maintain the network, CWA said.
“By cutting up the company, AT&T is going the exactly opposite direction of every major telecom company. This plan doesn’t make good business sense, particularly if the company’s intent is to provide the integrated service that customers want,” said Jim Irvine, CWA vice president for communications and technologies.
Gene Kimmelman, co-director of publisher Consumers Union, furthered the collective consumer disapproval, saying AT&T’s decision to break itself into four companies is “an ominous sign that the deregulation of the telecommunications industry is not working.”
Armstrong will continue as AT&T’s chairman and CEO. He said the company’s board of directors will name CEOs for the consumer, broadband and business units at the appropriate time. John D. Zeglis will remain chairman and CEO of AT&T Wireless Services Inc. and Mohan Gyani will remain its president and chief operating officer.
AT&T said it intends to offer its shareholders the opportunity to exchange their AT&T common stock for AT&T Wireless tracking stock. AT&T Wireless is expected to become an independent company by next summer. At that time, the company said it also plans to conduct an initial public offering of a tracking stock for AT&T Broadband. Financial terms of the agreement were not disclosed.
The divestiture came on the same day the company reported third-quarter earnings. AT&T said its revenues for the third quarter ended Sept. 30 were $17 billion, a 3.7-percent increase from the $16.33 billion reported for third-quarter 1999.
The company’s net income fell 30 percent for the quarter to $1.32 billion, or 35 cents per share, compared with 50 cents per share reported for the same period last year.
What about wireless?
“We had the best quarter ever,” said Gyani, during AT&T Wireless’ third-quarter earnings call.
Still, it remains to be seen how the shake-up will affect AT&T Wireless in the midst of an intense movement to consolidate the wireless industry. AT&T commenced a $10.6 billion IPO of a tracking stock for the wireless unit in April. At that time, the stock opened at $29.50, and at RCR Wireless News press time it was trading at $22.25.
Revenues for AT&T Wireless increased 36.6 percent from third-quarter 1999 to $2.8 billion, and the total number of subscribers reached 15 million. The company’s recently launched PocketNet service has more than 300,000 subscribers and around 50,000 are being added per month, according to Zeglis.
“It was no one single thing that we did during the quarter that created the fabulous results we had, it was a combination of things … It was not so much promotions as bringing our pricing back in line to what we saw out there in the market place. We are not a price leader, but we are definitely a price follower if we feel we need to be one,” said Gyani.
In addition to its Digital One Rate plan, AT&T Wireless also offers Regional Advantage and Digital Advantage calling plans, both of which Zeglis said helped to boost subscriber numbers. If AT&T Wireless continues to be a price follower, consumers can expect their per-minute rates to be relatively unaffected by the split.
On the data front, Gyani reiterated AT&T Wireless’ plans to migrate toward EDGE
technology to support third-generation services, which will align the company with GSM-the most widely used standard in the world.
“EDGE is the way to go when we are farming existing spectrum. To the extent that we have new spectrum or we can farm out enough of it, UMTS is clearly
the desired place to go. We will do it within the cost parameters, which is in the $6-$10 per pop range,” Gyani said.
UMTS is the European term for wideband-CDMA, the next evolutionary step for EDGE.
The company’s recently launch fixed-wireless service, known as “Project Angel,” is poised to commence in several more markets in the coming months. There are about 6,000 subscribers using the service now. Although it is a broadband data technology, AT&T will not include it under the umbrella of the AT&T Broadband unit.
Currently Project Angel only is available in Dallas, but Zeglis said the service will be launching in San Diego soon, with plans to launch in Los Angeles, Houston and Anchorage, Alaska.
