AT&T Bear's Den
by Paul Larson ([email protected])

With a company so large, it will be difficult to concisely scribe my thoughts in such a limited format. Nevertheless, I'll try my best to explain why I have more negative impressions than positive ones when I look at AT&T.

When I think of Ma Bell, I think of two different three-letter adjectives: big and old. The "big" description -- with annual revenues of over $50 billion -- is not to be contested. What we will obviously debate here is the "old" description of the company and where it is headed in the future. Essentially, I think the company is working with assets and competitive positions that are getting long in the tooth, while my Foolish associate David thinks otherwise.

First, let's talk about the company's main product -- long-distance service. You must be living in a tree if you haven't noticed the proliferation of the company's competitors and the rather dramatic decrease in rates that can be had. Let's face it, long-distance service is essentially a commodity these days, and the cost of switching service providers is minimal. I've switched among providers many times, and I've never noticed a change in the quality of my phone calls at all. Well, I have noticed one change -- a lower phone bill. Good news for yours truly, bad news for Ma Bell.

Let me put it to you this way. The cash cow is getting thinner.

I call the company "old" not only because it's been around a long time, but also because the company's assets are aging rapidly. Ma Bell is still queen of long-distance, but she is showing her age as upstarts such as WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCOM)") else Response.Write("(NYSE: WCOM)") end if %>, Qwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %>, and Level 3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVLT)") else Response.Write("(Nasdaq: LVLT)") end if %> run circles around the company in what is considered the next-generation of communication -- Internet telephony. AT&T could catch up to these nimble and speedy upstarts in the race to provide the next-generation of services, but it's not going to be easy or cheap.

Those thinking that Ma Bell's recent alliance with British Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %> is going to save the ole company may be in for a rude awakening. Sure, there will be some minor operating efficiencies created between the two companies, but the new joint venture will primarily use existing networks and will probably not actively hunt new business opportunities to the extent that many believe. In other words, the British alliance will simply shuffle assets and revenues around and not really attract fresh customers.

Even when this joint venture gets on its feet, the competition internationally is not exactly a pushover. Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> and its Global One alliance with Deutsche Telekom AG and France Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTE)") else Response.Write("(NYSE: FTE)") end if %> will have a comparable global reach, and they are a force to be contended with.

Of course, I saved the best bearish bullet for last -- the Tele-Communications, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %> deal. Some have argued that the price AT&T is paying for TCI, nearly $50 billion in stock, is a tad steep for a company that, while large, also has an infrastructure that is under attack from new technologies and nimble competitors.

I would tend to agree that the price paid is rather expensive, especially after looking at what the company will have to spend to get TCI's cable network up to the standards of service that will be expected in the next century. Meaning, by the time the company actually gets around to spending the cash to upgrade TCI's network to two-way communication, large chunks of its customers will likely be using a competitor's service or may already be on the next-generation of Internet access. Furthermore, the price to be paid to bring TCI up to speed is not chump change. I've seen numbers in the $30 billion range thrown around -- no small capital expenditure, even for AT&T.

Maybe combining the largest long-distance and cable operators will create some operating synergies. Maybe they'll make a good couple, each with their large-size and outdated technologies. Call me blind, but I just can't see the good here. I just see two huge, slow to change companies with flat revenues getting whipped by smarter companies using better technology.

The "Ma" in Ma Bell may stand for the "mother of all write-downs" when all is said and done with the TCI merger. After all, AT&T is no stranger to special charges, and one only has to look at the company's NCR acquisition to see just how much cash can be flushed down the toilet with a poorly thought out merger. Just spy the small amount of retained earnings the company has relative to its size to see that AT&T has done a sloppy job of creating value in the past, and there's no reason to think the company's spending and losing ways will change in the future.

A big company? Yes. A young and intelligent company? Hardly.

Yup, I see AT&T getting old and slower with her age. Maybe "GrandMa Bell" might be a more apt moniker.

Next: The Bull Responds