AT&T Bull's Pen
by David Forrest ([email protected])

I have no idea what my esteemed colleague, Mr. Larson, is thinking, but how can you not be pumped up about AT&T? Here's a company that's undergone incredible change in the past few years. It has suffered management challenges and incredibly intense competition in its core businesses of long-distance and wireless communications. It has shed all of the businesses that it didn't consider to be "core" to its mission, and Robert Allen finally stepped down. Yet, with all of these challenges, the company has managed to turn itself around, lighten up on its weak businesses, refocus its attention, and work to create shareholder value.

As many followers of the Foolish Four know, Ma Bell was recently against the ropes, trading in the low $30s. For the past few years, the financial media had been complaining about Bob Allen and that the company had made bad investments in local carrier reselling, and the table was being pounded by shareholders wanting increased shareholder value. Smaller companies like WorldCom and Qwest were setting the world on fire with their focused operations and determined management teams. AT&T had to react or risk being left behind.

As we all know, AT&T spun off both Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> and NCR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCR)") else Response.Write("(NYSE: NCR)") end if %>. That alone helped create shareholder value as Lucent has been on fire since the spin-off. In just under 2 years, those shares (held by the Fool Portfolio) are up 265%. The company also sold off non-strategic and unprofitable businesses such as its submarine systems business, Skynet, DirectTV, LIN Television, and Tridom. (Yes, it had a submarine systems business. Amazing.)

AT&T has also refocused its strategy in a way that can be summed up like this: It wants to own the pipes that businesses and individuals use to communicate with one another, and it wants to collect the repeat revenue from the use of these pipes. More importantly, everything AT&T seems to be doing is going in the direction of higher margins.

The company has made three incredibly significant deals in the past year or so. First, it acquired Teleport Communications Group, which gave AT&T access in 66 different local markets, allowing it to market services and collect revenue from businesses in all of these places it was previously unable to attack.

Second, AT&T bid for cable giant Tele-Communications Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>. The merger hasn't been approved yet, but if it is, this offers AT&T critical expansion in Europe as well as the U.S. It also puts the company smack in the middle of the cable market, another industry just beginning to offer better margins and cash flow through the use of things like cable modems for high-speed access to the Internet. More pipes, more ways to reach people, more revenue streams.

Finally, the recently announced partnership with British Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> is a coup for Ma Bell. This instantly allows AT&T to sell Concert services here and it also gives the company European inroads. This will allow management to better compete with the likes of WorldCom, which has a decent head start in Europe. Best of all, the joint venture with British Telecom will be immediately additive to earnings.

AT&T is in the best shape it's been in for the past decade. It has shed its unprofitable businesses, refocused its attention, and made some smart moves with regard to acquisitions and alliances. Under the leadership of Michael Armstrong, I expect AT&T to continue plowing ahead in these various markets, and to continue to be a major, winning player in these markets.

Next: The Bear Argument