<THE FOOLISH FOUR>

AT&T Buys TCI
by Robert Sheard

LEXINGTON, KY. (June 24, 1998) -- In a deal announced this morning that affects not only some Foolish Four investors, but also some Keystone investors (see our Workshop area for information on the Keystone approach), AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> is going to acquire the #2 cable television powerhouse Tele-Communications, Inc. 'A' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>.

The deal will allow AT&T to use TCI's network for local telephone and Internet services, a crucial step for AT&T to attempt to boost revenues. New top dog C. Michael Armstrong has been cutting costs successfully and raising earnings as a result, but he knows that he has to find ways to boost revenues significantly if the biggest U.S. long-distance company is going to continue the turnaround it started in 1997.

AT&T will issue 0.7757 share for each class 'A' TCI share and 0.8533 for each class 'B' share. The acquisition is expected to be completed in the first half of next year. The programming arm of TCI -- Liberty Media -- and AT&T Consumer Services will trade as tracking stocks, making the deal that much more complicated for analysts to understand.

Late in the session, AT&T was trading down nearly 8% on the news while TCI was up over 4%.

The real question for Foolish Four holders (or even Keystone holders) when these mergers and acquisitions (or even spin-offs) take place is what to do with the changes. And in keeping with the completely mechanical nature of these approaches, I'm not going to try to predict the short-term futures for these stocks. I'll leave that to analysts more familiar with the field (and there will be no shortage of opinions, rest assured).

But in a model such as ours, when a situation like this occurs, the plan of action is to do nothing out of the ordinary. Hold your stocks (newly acquired or original purchases) until your normal update. At that time, liquidate anything not in the current rankings as you normally would and renew your portfolio.

For example, let's say you're a Keystone shareholder and your TCOMA shares get transformed into AT&T shares three months before your anniversary. Hold the AT&T shares until your normal update and then at that time, assuming AT&T is not in the current Keystone rankings, sell the position and reallocate the proceeds in the new stocks. The tax treatment is usually such that your original purchase date of TCOMA is your official acquisition date, so your sale of the new AT&T position only three months after getting it isn't going to affect your holding period. You'd still qualify for the one-year rate based on your purchase of the original TCOMA.

In other words, treat these events as mechanically as you would the purchase or sale of any positions. Now, I'm sure to be asked whether it's "okay" for one to keep the altered position if one really likes the stock. Of course -- it's your investment money to do with as you think best. The brainless, rigid model, however, is different from those human decisions. It simply updates to the new Dow (or Keystone) stocks like clockwork and doesn't make those individual analyses and decisions. It does nothing in between the annual updates -- period.

Do what your research tells you is best if you're making these decisions individually. But if you're following the model exclusively, wait until your regular update and then make the necessary adjustments. Fool on!

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]

06/24/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +   9/16  48.00 
 IP   +   1/8   43.56 
 MO   -   7/16  39.13 
 EK   +1  3/16  68.38 
  
 
 
                    Day   Month    Year 
         FOOL-4   +0.63%  -2.63%   3.71% 
         DJIA     +1.08%   0.27%  12.84% 
         S&P 500  +1.20%   3.86%  16.74% 
         NASDAQ   +1.80%   5.56%  19.57% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     68.38    12.90% 
  12/31/97  291 Union Carb    42.94     48.00    11.79% 
  12/31/97  289 Int'l Pape    43.13     43.56     1.01% 
  12/31/97  276 Philip Mor    45.25     39.13   -13.54% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  14085.25  $1609.38 
  12/31/97  291 Union Carb 12494.81  13968.00  $1473.19 
  12/31/97  289 Int'l Pape 12463.13  12589.56   $126.44 
  12/31/97  276 Philip Mor 12489.00  10798.50 -$1690.50 
  
  
                              CASH    $415.96 
                             TOTAL  $51857.27