Bell Telephone spinoff: the long and short of it
- Ma Bell's 141 million customers will feel as if they've gotten a crossed line. Local telephone costs will rise, perhaps doubling or tripling, over the next five years.
- Long distance telephone callers, however, will get a better signal as rates drop over the same time period.
- Some 3 million American Telephone & Telegraph shareholders, the largest group of shareholders in the world, will take part in the largest financial transaction ever undertaken. AT&T's 22 operating companies, with assets of $83 billion, will be spun off. Wall Street analysts consider the decision highly favorable to AT&T and its shareholders.
- AT&T, which has built up its image as a ''family'' type of company, will suddenly find itself in the competitive world of high technology, competing against computer giants like International Business Machines and free spirits in the telecommunications business like MCI Communications. Securities analysts say they would not be surprised to see AT&T enter the cable TV business, computer time sharing, or data processing industry, for example.
These are but a few of the implications of the American Telephone & Telegraph-Justice Department consent decree, breaking up Ma Bell's empire. The antitrust decision was announced by William F. Baxter, assistant attorney general in charge of the antitrust division of the Justice Department, on Jan. 8 in Washington. Although it divests the shares of those 22 companies, it will allow AT&T to keep its long distance network. It will also permit the company to keep Western Electric Company, its manufacturing arm, and Bell Telephone Laboratories, its research facility, which invented the transistor and the laser. Bell can retain ownership of customer equipment, such as phones and switchboards.
The settlement concludes a lawsuit that has cost AT&T $360 million in legal fees over a seven-year period. If the consent decree had not been reached, the Justice Department was willing to go to trial later this month to press its case. Judge Harold Greene, district court judge, would have been the trial judge , and he must still approve the consent decree.
There is little doubt the decision will touch every consumer's pocketbook. At a hastily called press conference, William Ellinghaus, AT&T's president, told reporters that local phone rates could possibly double or triple as the phone company spun off its local operating companies. Profits from the long distance operations, he pointed out, have provided a cushion to the local phone user. This cushion would no longer be available and state public utility commissions would have little choice but to increase local rates.
A key factor in how much those rates would rise, says William McGowan, chairman of MCI Communications, a Bell competitor in the long distance market, would be how AT&T allocates its corporate overhead costs between its local and long distance operations. ''What Bell will attempt to do,'' Mr. McGowan says, ''is to leave more costs than they should in the local systems and make their long distance operations look lean.'' McGowan said it's important that the Justice Department preside over the dismantling of the system to ensure proper distribution of the costs.
For its part, AT&T says, the Federal Communications Commission will still regulate the long-lines operation and the states will oversee local operations. ''Both parties have a vested interest in ensuring any cost allocation is made equitably,'' an AT&T spokesman says.
There is little doubt some areas will see their rates go up more than others. For example, customers of Pacific Telephone & Telegraph may experience a large increase, since local rates have traditionally been held down by the California Public Utility Commission. Customers in the state, however, grumble that their service is terrible and the company doesn't deserve any rate increases. (In August, however, Pac Tel received a $610 million rate increase, which officials say should help it.)
Bell officials say prices won't rise strictly because of the divestiture. As most consumers are aware, rates have been rising steadily anyway due to inflation. Furthermore, they state, the trend in regulation had been to allow the price of service to be more closely attuned to cost.
Bell officials also say that the local operating companies will be able to charge an ''access fee'' to any long distance companies tying in to the local system. This fee will partly offset the loss of the profit cushion now provided by long distance service.
Telephone company analysts expect that long distance and business exchange rates will come down as the phone company competes against such companies as MCI and Southern Pacific, which offer extensive long distance networks. The growth of some of these companies has been phenomenal. According to McGowan, MCI has been adding 40,000 to 45,000 new customers per month, an increase of its customer base of 7 percent per month.
McGowan, who is known as an outspoken entrepreneur, says the prospect of competing with AT&T doesn't bother him. ''They are fat, expensive, and highly inefficient,'' he charged during a phone interview, adding, ''Let us compete. They would never be able to.''
Indeed, tackling the competition will not be easy for Bell. For example, even though the phone company has been in business since July 9, 1877, its long distance department has not been in the business of billing customers. An AT&T official says this is an issue it will cover later.
The telephone company will also find itself playing catch-up ball with such companies as IBM in data processing. AT&T's Western Electric subsidiary will also have to compete with other companies, including the Japanese, to sell equipment to the local subsidiaries. For years, Western Electric has had a captive market for its products.
Despite such concerns, analysts on Wall Street considered the antitrust settlement a plum for shareholders. Gerald Morgan, an analyst at Bache Halsey Stuart Shields Inc., noted, ''This is a positive development.'' And Linell McCurry, an analyst at Butcher & Singer Inc., a Philadelphia brokerage house, said, ''This seems attractive to AT&T, since they are keeping all the good stuff.'' Another analyst, with a Boston institution, says, ''This eliminates a cloud over the company.'' With its new business prospects, he holds that investors will give the company a higher price-to-earnings multiple.
The big question facing shareholders, says Bache's Mr. Morgan, is how the divestiture will be structured. Will the operating companies be wrapped up into regional packages or a national package, for example? Or will shareholders receive stock in each of the operating companies? Mr. Ellinghaus indicated that AT&T is studying the best way to answer these questions and in the next 18 months would have some answers.
Securities analysts consider some of Bell's subsidiaries better than others. According to Morgan, the higher-quality companies are Indiana Bell, Wisconsin Telephone, New Jersey Bell, Illinois Bell, New York Telephone, and Southern Bell. Those of lower quality, he says, are the Chesapeake & Potomac Telephone Company of West Virginia, Michigan Bell, New England Telephone, South Central Bell, Pacific Northwest ell, and Pacific Telephone & Telegraph. Mr. Ellinghaus maintains that all of the operating companies ''are financially sound.''
Should any of these companies need cash while AT&T sorts out the new structure of the company, AT&T is confident it can find the money. Last year AT&T and its subsidiaries borrowed $6.7 billion in the public debt markets and this year expected to borrow slightly less.
The AT&T settlement encouraged the stock market. Prices moved higher Friday, with the Dow Jones industrial average climbing 4.75 points to 866.33. Trading in the stock of both Bell and IBM was suspended. For the week, the Dow was down 8. 47 points.