AT&T Bets Sum of Its Parts Is Greater Than the Whole
PITTSBURGH AND NEW YORK — AT&T has a message for corporate America: Bigger isn't necessarily better. The telecommunications giant is cutting against a wave of corporate mergers with its plan to break itself up into three companies - a move that stunned industry analysts The step may sound a cautionary note for Congress, which is wrapping up a wide-ranging telecommunications bill that is likely to encourage more mergers and strategic partnerships. ''At a time when everyone is talking scale in the communication industry, for AT&T to go in the other direction sends a wake-up call and forces people to rethink that whole issue,'' says Mark Plakias, managing director of Strategic Telemedia. Adds Eli Noam, director of Columbia University's Institute for Teleinformation: ''Synergies these mergers promise may not come true - as AT&T found out the hard way.'' For most of the decade, Congress, broadcasters, telephone, and computer companies have been enamored with a technological trend called convergence. It was a beguiling idea. Since computers, telephones, and televisions are starting to look more and more like one another and are starting to perform the same kinds of functions, separate industries would begin to converge. That was the theory, anyway. It was this thinking that pushed Congress into passing legislation that would allow local, long-distance, and cable television companies to compete against one another. It is also why companies in all three industries have made a raft of strategic alliances with each other. And of all the companies involved in assembling the strategic pieces, AT&T had gone the furthest, with tentacles reaching everywhere from worldwide telecommunications services and wireless telephones to computer networking and equipment. In 1991, AT&T made a successful hostile bid to acquire computer-maker NCR for $7.5 billion. Two years later, it acquired McCaw Communications, the nation's largest cellular-phone provider, for $11.5 billion. Wednesday's surprise announcement by AT&T chairman Bob Allen changes all that. The new AT&T will be a $50 billion telecommunications and related services company, keeping the old long-distance, cellular-telephone, credit-card, and consulting units. The second company, not yet named, will be a $20 billion telephone and telephone-switch manufacturing company with the added benefit of leading-edge research from Bell Labs. The third company will be the former NCR, an $8 billion networking computer business that had been losing money under AT&T. The breakup will be accomplished over the next year. ''It was a business-driven decision,'' says AT&T chief strategist Richard Bodman. ''We were a collection of companies attacking segments of an industry that were all changing at the same time.... Bureaucracy stands in the way of speed in that kind of environment.'' Investors cheered the move, sending AT&T stock up 11 percent after the initial news. Analysts were also positive. ''The leaner, more focused a company is, the better the chance for survival,'' says Rick Wargo, head of telecommunications executive search practice in Chicago at A T Kearney, a management consulting firm. He believes AT&T has the best brand recognition to move into new markets. Analysts also upbeat about the spinoff of the manufacturing part of AT&T. They point out that the Baby Bells, the companies which now provide local telephone service, will be able to buy equipment from the new company without fearing that they are just helping AT&T compete against them. ''There are probably a lot of AT&T customers feeling better about dealing with them since they won't be competing with their supplier,'' says Mr. Plakias. At the same time, the spinoff of the equipment manufacturer frees up AT&T to go outside for its equipment. The AT&T move is also likely to cast a harsher light on other mergers, especially in telecommunications. ''If you look at these alliances and acquisitions with the convergence of content and computers, they are terribly complex and just running them is going to be an 80-hour work week,'' Mr. Wargo says. .Convergence, for all its strategic appeal, may turn out to be just one more corporate fad. ''From the user side, convergence is here,'' says Bill Ablondi, vice president of BIS Strategic Decisions. ''I don't think any company has shown the ability to be an all-in-one supplier.''