AT&T-TCI marriage makes sense, and shareholders can make money

The Outlook

July 19, 1998|By J. Leffall

IN THE WAKE of the AT&T-TCI $31.7 billion merger deal, AT&T's stock has dropped as investors worry about the costs the telephone giant will incur to upgrade TCI's cable systems and uncertainty over whether those costs can reasonably be charged to consumers. Is this a good deal? Will the merger go through?

Jeffrey Kagan

Telecom industry analyst, Kagan Telecom Associates, Atlanta

First of all, the merger will happen. It is what AT&T needed to do. But it is a question of what will happen if the stock keeps dropping. Mike Armstrong, the chairman at AT&T, is faced with a real nut to crack. He has to radically change his company, and the shareholders are averse to change and tend to revolt on anything radical. They are conservative and timid. If this were MCI, the investors would be all for it -- that company was born into chaos. But this company, AT&T, has been trying to turn itself around, and in transition sometimes taking risks is, well, risky.

There is a huge hurdle, and that's the cable industry's reputation for service. AT&T has been reliable with its phone service. But the cable industry has real problems with service going out at a moment's notice, bad personnel who don't respond to customer needs in a timely manner. We've grown to expect that from cable companies. But that's intolerable for a phone company. It's not going to be easy.

The marketplace is kind of confused but that's because things are being examined from two perspectives and two agendas, future and present. Investors don't care about long-term benefits -- they want to get paid right now. They've got to get over the hump of the stock dropping. But Armstrong cares about the future and he wants to go ahead and do this, but until the cold feet of the investors is dealt with, it's going to be rocky.

Kevin Moore

Analyst, BT Alex. Brown, Baltimore

We think it's a good acquisition, but we believe there are some differences, one being the disparity between the two companies as far as earnings per share is concerned. AT&T wasn't going to go out of business without this deal, but they needed it definitely to stay on top. If this goes through, the telephone bill will be a one-stop shop. Consumers will be able to have everything.

As far as the investors are concerned, we think they will come around eventually in the next 12 months when they get comfortable with the marriage of the two companies and start to see the obvious benefits. We think it's a great idea and the possibilities are endless. Shareholders at AT&T have apprehensions, but maybe everybody who holds stock in the company just isn't informed. Maybe they don't understand the dynamics of the deal and what it means for not only AT&T but the telecom industry. As time goes on, they will, though. Hopefully.

Anthony F. Ferrugia

Analyst, A.G. Edwards, St. Louis

I think, conceptually, the acquisition makes sense. You have technology and investment interests that are competing, though. The two factions -- technology vs. investment -- have caused uncertainty and it could be some time before that uncertainty goes away.

Two things that would stave off that uncertainty though would be one, execution of the deal, and two, passage of time. The merger with TCI is about waiting it out and seeing what happens. Armstrong needs to keep the possibility of entering into a new world of business alive for the company and keep things running smoothly even after everything is finalized.

The cross-selling of new products to AT&T customers will be essential after everything is finished. Approval on all sides, however, will be the forthcoming issue.

I'm sure this will get regulatory approval but I basically think AT&T's stock is going to stay low for while until this uncertainty is cleared up.

Douglas A. Christopher

Analyst, Crowell, Weedon & Co., Los Angeles

Well, AT&T is paying a lot of money for this deal. That's one thing I can tell you. We've looked at its performance and what's happening is that AT&T is in a turnaround mode. Once this restructuring and turnaround cycle is completed, then the company can go on with a strategy and that has to be a self-improvement strategy. It has to be a strategy that is prepared to convince consumers to switch to using cable modems. This merger is yet another move in a a long drawn-out transition.

For this to work, there will have to be significant expenditures on the part of AT&T even after this costly merger but what AT&T needed was a change in culture and a change that creates better opportunities to remain on top. But it will be several years before a real good synergy is achieved, and it will take a while for new cable-based products to catch on with the general population.

Pub Date: 7/19/98

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