AT

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ATT (then now)
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First, analysis of ATT then (divestiture of
Baby Bells 1982)
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What was ATT like before the divestiture?

• Supplied telecommunications service to over 80
  of U.S. telephone users
• 1981 largest private enterprise in the world
  (employed over 1 million workers, 798 thousand in
  local operating companies)
• widows and orphans stock (over 3M shareholders,
  95 held less than 600 shares, never
  missed/lowered dividend since 1885)
• Target dividend payout ratio of 60 (one-third of
  dividends reinvested back in company)
• debt ratio of about 40, but maintained AAA
  rating
• local operating companies very capital intensive,
  however generated fairly stable cash flow (safest
  of ATTs units)

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Antitrust Suit

• ATT agrees to spin-off seven Baby Bells
  January 1982
• New ATT will include the following
• ATT Communications long distance business
• Western Electric provide equipment and support
  to local telephone companies
• ATT Information Systems (ATTIS) provide
  telecommunications equipment to businesses and
  households
• Bell Laboratories expected to continue to
  conduct RD
• Computers?

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Impact of divestiture on ATT financial situation

• Stock price up 4 relative to SP 500 day after
  announcement of anti-trust settlement
• Bond prices fall on news
• SP adds ATT to possible bond-downgrade list

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Why Possible Downgrade?

• ATT no longer a utility and a monopolist in a
  highly-regulated industry
• New ATT faces increased business risks and is
  more like an industrial firm
• WSJ analysis
• ATT sees its terminal (customer equipment) and
  long distance business . . . becoming
  competitive. It may be appropriate for a utility
  to have a 45 debt ratio and still maintain its
  AAA rating. But the proper capital ratio for an
  industrial concern is about 25.
• ATT may no longer be a haven for widows and
  orphans

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What are ATTs financial needs?

• Estimates suggest that ATT will have sufficient
  earnings to pay for investment needs and will
  generate a net financial surplus in the next few
  years
• However, estimates are noisy

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What should ATT do financially in 1983 (year
before divestiture)?

• Do Nothing (debt ratio of about 30 as approach
  divestiture)
• Sell Equity (stock currently doing well)
• Sell Debt

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What actually happened?

• On February 28, 1983, ATT announced its
  intention to sell about 1 billion of new common
  stock.
• If you were an investor, how would you react?
• Positive/Optimistic spin ATT raising funds
  because it has good investment opportunities,
  building financial flexibility in coming battle
  over long-distance service and/or computers
• Down side Maybe management believes things are
  not going well and thats why they need the cash.
  Maybe they think the stock is overvalued (closed
  at 17-year high of 68.50 1/17/83)

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Market Response to SEO

• Market value of equity fell 2 billion on
  announcement of SEO (fell 2.375 from 68.375
  about 3 fall)!!!
• Why?
• Dilution effect?
• Too small shares outstanding went up 1.9 but
  stock price went down 3 (also ATT gets )
• Negative signal?
• WSJ analyst Im not sure the offer makes a
  lot of sense ... Maybe ATT thinks the stock is
  going to go down.

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What happened after 2/83 SEO?

• Poor earnings in first quarter of 1983
• Earnings continued to be below forecast remainder
  of 1983
• 5.5B write-off of ATTs technologically
  outdated capital equipment
• ATT ended 1983 with debt ratio of 36
• Bond rating fell from AAA to AA
• Continued lackluster performance through the
  1980s (long-distance did well but computers and
  communications equipment did poorly)

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Why SEO 2/1983?

• Firm facing uncertain future
• Earnings will likely be below expectations
• Possible write-off to capital base
• High stock price
• BOTTOM LINE
• issue stock at a good price and build financial
  flexibility as a hedge against future uncertainty

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ATT (now)
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ATT gift that keeps giving!

• Former CEO Mike Armstrong had a vision when
  joined ATT in 1997
• ATT will be at forefront of new economy
• Package telephone, internet, cable
• Problem Need cable!
• Late 1990s, spend 100M to acquire cable
  companies (including 58B for MediaOne)

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What gives the balance sheet!

• ATT 1998
• 6.7B in debt
• Debt ratio (book) 0.21
• Debt ratio (market) 0.05
• ATT 2000
• 65.0B in debt
• Debt ratio (book) 0.39
• Debt ratio (market) 0.50

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Debt, Debt, Debt!!!

• Pre-cable era
• Total operating income 1995-98 24.5B
• Net interest expense -0.8B
• Post-cable era
• Total operating income 1999-2002 23.3B
• Net interest expense 12.2B

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Break Ups Can Be Nasty!

• Given debt burden and stagnant cash flow, forced
  to sell off two divisions (keep business
  consumer services)
• ATT Wireless IPO in 2000
• ATT merges cable business with Comcast in 2002
• (cable assets worth about half what paid just
  two years earlier)
• After spinning off cable assets, stock price
  expected to be trading in 4-5 range

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Reverse Stock Split to the Rescue!

• 4/10/2002, ATT announces 1-5 REVERSE stock split
  (effective 11/2002)
• Lucent, Nortel Networks, Palm announce reverse
  stock split plans in fall of 2002 as well
• Why?
• Market Reaction?
• Following split, stock outperforms market by 7
• Following reverse split, stock underperforms
  market by 11
• Stock price falls 8 for ATT on announcement

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Moving In With the Kids!

• January 2005, SBC Communications (one of the Baby
  Bells) agrees to purchase ATT for 16B (15B
  stock 1B cash)
• ATT shareholders will receive 0.78 shares of SBC
  stock for each share of ATT own, also, ATT
  shareholders will receive 1.30 special dividend
  when deal closes
• Companies expect to generate net present value of
  15B in synergies from merger
• Market seems to disagree, as both ATT and SBC
  stock prices were little changed on the merger
  announcement
• Deal closed November 2005 (after passing several
  regulatory hurdles)

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