Keep It Together
The breakup of AT&T could be headed for a brick wall, as institutional investors and union leaders mount counterattacks on the plans and power of Chairman C. Michael Armstrong.
"This is a profound decision over the future of AT&T," said Brandon Rees, spokesman at the AFL-CIOs Office of Investment. "Weve seen some missteps among the management, and it calls into question their performance."
The AFL-CIO is joining with the Communications Workers of America to rally institutional investors against segmenting the company.
The unions clearly have a vested interest in preventing what they fear will be lost jobs sparked by a breakup. They are major stakeholders in the company, and union officials said their chief concern is the impact a breakup would have on pension funds invested heavily in AT&T stock.
The unions are not the only investors concerned. Trustees of pension funds for New York state and New York City, with big AT&T investments, have questioned the wisdom of the breakup. So has the director of the Council of Institutional Investors, an organization of large pension funds.
In hopes of rallying other investors to its side, the AFL-CIOs Office of Investment will hold a conference call Feb. 8 with other organizations and analysts to seek support for its opposition to the breakup. Michael Garland, corporate transaction officer at the Office of Investment, said interest among investors is running high.
"I dont think its going to be hard for us to drum up interest," Garland said. "If this gets blocked, I think thats an extremely strong signal from shareholders that they believe in the original strategy of bundling services. If this managements not able to execute this strategy, maybe they need new management."
While Armstrong has campaigned hard for breaking up the conglomeration of cable, wireless and long-distance services he built over the past three years, he wasnt interested in talking about the anti-breakup campaign last week. Efforts to reach executives for comment on this story were rebuffed by corporate spokesman John Heath, who said AT&T had no comment on the campaign.
Armstrong has cited three reasons for the breakup: boosting the currency or stock price of each of the four parts; increasing shareholder value; and increasing employee motivation. He believes the value of faster-growing parts of the business such as broadband and wireless has been obscured by the rapid implosion of the core long-distance telephone business. The split, Armstrong argues, will strengthen the business units by giving them more freedom and entrepreneurial incentives.
His plan has won support inside the company from employees who look forward to gaining more freedom from the ossified corporate culture that emanates from Basking Ridge, N.J., headquarters. And some analysts think the plan has enough chance of success to warrant upgrading the stock, which has gained value this year to return to about its value at the time the breakup was announced.
However, the CWA, representing 35,000 of the companys 165,000 workers, has accused management of "bundling bungling" after failing to ever truly integrate the cable, wireless, Internet and long-distance elements as Armstrong set out to do. Union officials have launched a Web site, www.attinsider.com, as part of their campaign.
AFL-CIO Secretary-Treasurer Richard L. Trumka said last years 66 percent decline in AT&T shares and last weeks announcement of a $1.7 billion fourth-quarter loss heighten anxiety about plans to spin off separate, competing companies over the next two years. "Worker funds must look closely at this restructuring," he said.
Despite the anti-breakup campaigns blue-collar tinge, the campaign resonates on Wall Street, where many analysts have panned the plan to further subdivide the original Ma Bell.
"While AT&Ts shares may be undervalued at current levels, we think the whole is worth more than the sum of the parts and that the breakup plan will destroy shareholder value rather than create it," Morningstar analyst Michael Hodel wrote in a recent report.
Even the short-term boost expected from the Oct. 25 breakup announcement eluded Armstrong; shares dropped 13 percent the day the plan was announced.
"They did it to appease investors, and it hasnt had that effect. In fact its had the reverse effect," said Cynthia Brumfield, president of Broadband Intelligence, a consulting firm that advises cable and other broadband companies. "There has been some scuttlebutt that it hasnt worked and they might want to reconsider it."
In reporting AT&Ts fourth-quarter earnings, top company officials did not directly address the breakup, aside from Investor Relations Director Connie Weavers warning that the company can make no assurances the plan will be approved.
The first test of strength will come in May, during the regular shareholders meeting. There, AT&T will propose a charter amendment to reduce the number of votes needed to approve the breakup. The unions believe that, under the present charter, a two-thirds majority is required. The actual vote on the plan will come at a special shareholders meeting later in the summer.
Institutional investors hold 47 percent of AT&T shares, with pension funds for public employees in New York, California and Texas ranking among the largest shareholders.
H. Carl McCall, comptroller for New York state, and Alan G. Hevesi, comptroller for New York City, have both questioned the wisdom of the move. McCall is the sole trustee of the $120 billion New York State Common Retirement Fund, which holds 11.8 million AT&T shares. Hevesi is a trustee of the $100 billion New York City Pension Funds and Systems with 13.3 million AT&T shares.
As of Feb. 1, AT&Ts total market value was $91.81 billion, and the company had roughly 3.4 billion shares outstanding.
McCall and Hevesi held press conferences critical of the breakup plan after Armstrong appeared before a meeting of the Council of Institutional Investors last December. Armstrong reportedly said he had been "sandbagged" at the investors meeting, which was heavily attended by union supporters.
Some of those opposing the breakup also want to limit Armstrongs power. A resolution on the May 23 shareholders agenda would require that the positions of board chairman and chief executive be held by two different people.
Meanwhile, the 62-year-old Armstrongs restructuring plan could also serve as his own exit strategy, the AFL-CIOs Garland said.
"I think Mr. Armstrong has a lot wrapped up in this personally," Garland said. "I think he is looking for a quick fix, so he can look like a hero heading out the door."