The lively debate over AT&T: Will stockholders benefit?
On Jan. 1, 1984, American Telephone & Telegraph will distribute eight pieces of paper to its 3 million shareholders.
These pieces of paper will represent shares in its operating subsidiaries, divided into seven different regions, and shares in what is left of AT&T. In theory, for every 100 shares a shareholder owns when the breakup occurs, he or she will receive 170 new shares: 10 shares in each of the seven operating companies and 100 shares of Ma Bell.
Even though the exchange is a year away, and there are a lot of unanswered questions about the future of the Bell System, it has already sparked a lively debate on Wall Street over what investors should do. Some analysts, concerned over whether or not AT&T can compete in a nonregulated environment, are advising investors to shy away from the company. Others, however, believe the telephone company will surprise the skeptics and will do well against such companies as IBM, GTE, and MCI Communications. Still other advisers believe the eight pieces of AT&T will be worth more than the whole. And, of course, investors at this point have no idea what the dividend rate will be when all the pieces are put together.
Before the split-up, analysts expect AT&T stock to perform in line with the rest of the stock market. ''Between now and then,'' states Leonard S. Hyman, vice-president at Merrill Lynch & Co., ''you have to look at the earnings and dividends and where the economy is going.''
Because of its disappointing earnings - which it blames on the flat economy - the stock recently has been under some pressure. From a yearly high of $645/8 the stock has sagged to a current price of $581/2.
The stock has also been under pressure somewhat since many analysts don't believe the company will raise its dividend when its board meets in February. Comments one analyst who works for a Boston-based institution, ''The earnings in 1983 won't justify a dividend increase, and the company dosen't want to saddle the operating companies with having to maintain a higher level after the split.'' Once the subsidiaries develop their own dividend policy in November, some analysts believe AT&T will increase its dividend, which currently gives the stock a 9 percent yield. The dividend has remained unchanged for two years, the longest the phone company has gone in recent years without increasing it.
Once the split up occurs, says William Beardsley, group director of the investment analysis department at Minneapolis-based IDS, ''We believe the pieces will be worth more than the whole.'' Thus, Mr. Beardsley views the split as ''positive for the shareholders.'' However, between now and January 1984 he thinks AT&T stock may remain flat. Investors might consider selling the stock now, he says, and putting the money elsewhere until it gets closer to the breakup. At that point, he would suggest holding it, ''and picking up the pieces.'' As it gets closer to the divestiture, he anticipates the stock will generate more ''excitement.'' IDS, he adds, is not a major shareholder of AT&T.
However, Mr. Beardsley notes that on Wall Street there is considerable debate over who will be stronger - the parent company or the subsidiaries. Presumably there will be a lot of shifting around early in 1984 as analysts probe the strengths and weaknesses of each regional subsidiary.
For example, Frank Parrish, senior vice-president at Fidelity Management & Research, says he likes Southern New England Telephone since the regulation appears to be more favorable and the capitalization looks better than some of the other companies. However, he adds, one reason AT&T recently issued $1 billion of new common stock was to have some extra equity to even out the capitalization ratios of its various subsidiaries.
Mr. Beardsley finds some of the subsidiaries interesting since they are not very highly leveraged. The average capitalization of the operating subsidiaries is made up of between 45 and 50 percent debt. This is a lower debt ratio than most utilities have. In addition, the operating subsidiaries will have control of the Yellow Pages, which are very profitable.
Once the parent company becomes unregulated, some analysts believe it will have problems competing. However, John J. Jones Jr. of Oppenheimer & Co. comments: ''They are certainly structuring their personnel so that the more capable workers are gravitating toward the surviving AT&T and baby Bell . . . the new Bell should be a formidable competitor.''
Leonard Hyman of Merrill Lynch agrees: ''It will be a question of building up the operation. They do have the ability to compete. The company is not run by flabby people who don't know what to do.'' Even if they are initially unsuccessful, he states, ''They should make a dent in the market. Up until recently their competitive practices were basically nonexistent.''
In its first competitive action, American Bell, known as ''Baby Bell'' to some, disappointed some analysts. This fall an insurance agency network accepted bids for a communications network to provide data-processing services at volume discounts. Among those competing for the multimillion dollar contract were IBM, Control Data, Electronic Data Systems, and American Bell. IBM won.
''It's inevitable they will have some losers,'' comments Mr. Hyman, ''They will be moving very ambitiously by next year, but they won't get all of the contracts.''
Mr. Beardsley likewise believes the phone company, like a sleeping giant, will emerge with some new products it can sell. ''The loosening of the regulatory reins will bring forth the dormant entrepreneurism,'' he says.
Analysts also felt the Federal Communication Commission's latest decision allowing local phone rates to rise, ending the subsidy provided by the long-distance network, might benefit both AT&T and its competitors. Noted Charles DiSanza, an analyst with Drexel Burnham Lambert Inc., ''It does help AT&T, but I think it also helps MCI. The thrust appears to be fundamentally equitable.''
Investors stuffed their stockings with stock certificates in a pre-Christmas buying stint that pushed the Dow Jones industrial average up 33.56 points where it closed at 1,045.06. Some buyers were inspired by expectations the Federal Reserve Board would lower the discount rate early next year; others were encouraged by a rash of mergers.