New AT&T, Old AT&T
So after devouring a series of other companies, SBC ate its rapidly deteriorating parent AT&T last year, and then took over its name. Now, as the new AT&T, the company is poised to buy BellSouth for $67 billion. I’m sure this won’t be the last big deal we read about, because CEO Ed Whitacre's “M.O.” is pretty clear:
• Grow via serial acquisition
• Pay premium prices for prey
• Aim to be a one-stop-shopping telecommunications mecca
Consumer advocates are worried about this deal. They think that it will diminish competition. I think they are worrying needlessly, because I think that ultimately, the new AT&T will implode the same way the old one did. The reasons go right to the heart of Whitacre's strategic biases:
• Growth via serial acquisitions is a prescription for a slow-motion collapsing house of cards (think MCI, Tyco, Vivendi, and Cendant, for starters). If you’re relying primarily on acquisitions, you’re conceding that you don’t really have an exciting value proposition and you don’t have enough cool compelling stuff in the pipeline to grow organically. Investors aren’t fooled. They’re already dinging AT&T.
• Paying top prices is one of the most egregious and common reasons for merger distress. Executives become so enamored of a prospective deal that they overpay, sometimes insanely. Whitacre pays whatever it takes. As of March 6, AT&T’s offer was $35 a share, which is so far above the real worth of BellSouth ($28 a share) that a Sanford Bernstein analyst concluded that AT&T is basically giving away the value of any potential synergies to Bell shareholders.
• The one stop shopping merger fantasy has seriously wounded many high-profile acquirers (think HP under Fiorina, or Schwab, or AOLTimeWarner, for starters). Customers don’t cooperate with the plan (they shop around). New technologies don’t cooperate (they “obsolete” the old acquired ones). New competitors—aggressive fast-growth niche players-- don’t cooperate, either (they do select things better and faster and usually cheaper).
So AT&T’s acquisitions make good copy. Newspapers love them. But at the end of the day, what will AT&T look like? A huge, unwieldy, costly, creaky, one-stop-shopping bureaucracy glutted with mini-empires offering a slew of “me-too”, commoditized, often-mediocre products and services. Hmm, doesn't that sound like the old AT&T?
• Grow via serial acquisition
• Pay premium prices for prey
• Aim to be a one-stop-shopping telecommunications mecca
Consumer advocates are worried about this deal. They think that it will diminish competition. I think they are worrying needlessly, because I think that ultimately, the new AT&T will implode the same way the old one did. The reasons go right to the heart of Whitacre's strategic biases:
• Growth via serial acquisitions is a prescription for a slow-motion collapsing house of cards (think MCI, Tyco, Vivendi, and Cendant, for starters). If you’re relying primarily on acquisitions, you’re conceding that you don’t really have an exciting value proposition and you don’t have enough cool compelling stuff in the pipeline to grow organically. Investors aren’t fooled. They’re already dinging AT&T.
• Paying top prices is one of the most egregious and common reasons for merger distress. Executives become so enamored of a prospective deal that they overpay, sometimes insanely. Whitacre pays whatever it takes. As of March 6, AT&T’s offer was $35 a share, which is so far above the real worth of BellSouth ($28 a share) that a Sanford Bernstein analyst concluded that AT&T is basically giving away the value of any potential synergies to Bell shareholders.
• The one stop shopping merger fantasy has seriously wounded many high-profile acquirers (think HP under Fiorina, or Schwab, or AOLTimeWarner, for starters). Customers don’t cooperate with the plan (they shop around). New technologies don’t cooperate (they “obsolete” the old acquired ones). New competitors—aggressive fast-growth niche players-- don’t cooperate, either (they do select things better and faster and usually cheaper).
So AT&T’s acquisitions make good copy. Newspapers love them. But at the end of the day, what will AT&T look like? A huge, unwieldy, costly, creaky, one-stop-shopping bureaucracy glutted with mini-empires offering a slew of “me-too”, commoditized, often-mediocre products and services. Hmm, doesn't that sound like the old AT&T?
posted by Oren Harari at 11:25 AM
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