HomeMy WebLinkAboutM-02-0657BY ROBERT KUTTNER
AT&T AND COMCAST: A BAD DEAL
FOR ALMOST EVERYBODY
DUBIOUS:
On close
inspection,
the proposed
merger
looks like a
sweetheart
deal that
will deeply
wound what
remains of
AT&T
Robert Kuttner is co-editor of
The American Prospect and
author of Everything for Sale.
Should AT&T be added to the growing corpo-
rate rogues' gallery that now includes En-
ron, Global Crossing, and WorldCom? What
these companies have in common is not just
their financial tailspins but scandals of self-deal-
ing and failures of corporate governance —s weet-
heart deals by insiders at the expense of share-
holders. AT&T's proposed merger with Comcast
Corp.—replete with huge shareholder losses and
insider favoritism—is not yet a front-page scan-
dal only because the other scandals are worse.
As recently as two years ago, AT&T was on a
buying spree. CEO C. Michael Armstrong spent
$97 billion to acquire two giant cable competitors,
TCi and MediaOne, in order to put AT&T square-
ly in the broadband business. By one indicator,
cost per cable subscriber, Armstrong paid double
their market worth. The buzzword back then
was synergy; AT&T—facing declining margins in
its core long-distance business—could bundle ca-
ble, Internet, wireless, and telephone services.
But that was then. Armstrong never executed
the synergy strategy, and it's not clear that the
idea was ever viable. As AT&T stock headed
south, Armstrong threw the concept into re-
verse. In 2001, he announced that the company
would be broken up into four pieces. Then Arm-
strong changed the game plan yet again, making
a deal with Comcast CEO Brian Roberts for a
super -merger that would give AT&T Comcast
some 40% of all U.S. cable customers.
The deal, which still must be approved by
three regulatory agencies and by shareholders,
has several suspicious wrinkles. AT&T and Com-
cast would merge only to have the prime por-
tion—the cable operation—be spun off into a
separate venture. The venture would have
Roberts as its CEO and Armstrong as its chair-
man. The Roberts family would get 33% of the
new company's voting shares at a cost of only 1%
of its assets. With Armstrong taking AT&T's
crown jewels to the new venture, some other
hapless soul would get to manage AT&T's low -
margin leftovers.
To a lot of critics, this looks like nothing so
much as an exit strategy for Armstrong and a
sweetheart deal. When the merger was an-
nounced, the cable assets Armstrong acquired
in 1999 and 2000 for more than $97 billion in
AT&T stock and debt were to be sold for just
$72 billion. Since the deal was announced, Com-
cast stock (which AT&T shareholders will receive)
has declined from $38 a share to below $30,
meaning that the deal is now worth only $62
billion to AT&T shareholders. So, after just two
years, CEO Armstrong is unloading for $62 billion
assets that cost AT&T shareholders $97 billion.
Unlike Enron or Global Crossing, let us recall,
AT&T is no house of mirrors. CEO Armstrong
took over a company that was once the gold
standard of American capitalism. How does a
chief executive get punished for blowing through
$35 billion in shareholder value? Last year, Arm-
strong received $17.2 million in total compensa-
tion, plus more than 1 million stock options that
can be exercised over the next five years. AT&T's
compensation committee explained that this was
an incentive to "align" Armstrong's interest with
the company's through 2005. Evidently, the in-
centive failed. But the kindly committee recent-
ly voted Armstrong an additional 1.4 million
stock options, worth $32 million even at AT&T's
depleted stock price.
The merger is structured to defy shareholder
challenges. There is only one shareholder vote on
the financial terms of the deal and the new gov-
ernance arrangements, which will make Roberts
and Armstrong very hard to fire.
The merger also would dramatically increase
concentration in the cable business. AT&T Comcast
would instantly dwarf everyone else, giving it
alarming control over pricing and content. As
long-distance telephone and wireless services
have increasingly become commodities with slen-
der profit margins, cable continues to enjoy im-
mense market power and profits to match. No
wonder Armstrong covets cable, even if the rest
Of AT&T will languish.
For decades, the cable industry has succeeded
in persuading Congress and the Federal Com-
munications Commission that real competition
is around the corner. But competition never ma-
terializes. Instead of competing with one another
to offer competition, cable companies merge with
each other to monopolize markets and raise
prices. Cable rates have risen, since 1996, at
triple the rate of inflation. FCC Chairman Michael
K. Powell has a remarkably sanguine view of
"intermodal competition"—the fantasy of cable
modems competing with DSL telephone lines for
Internet service, satellite competing with cable,
and so forth. But a study by economist Marc
Cooper of the Consumer Federation of America
shows that these markets remain highly seg-
mented and enjoy monopoly profits.
The AT&T Comcast deal is a perfect marriage of
bad corporate governance and bad public policy. If,
such games can be played at AT&T, problems of
corporate governance are endemic. Only the reg-
ulators can kill this deal—and they should. ■
26 Business Week / May 20, 2002 091-0— 6 5 7