AT&T tells the world that it's a "broadband communications" company ready to serve your every need, be it a wireless phone, long-distance service, an Internet connection or cable TV. In reality, though, what AT&T has really become is a marketing company. And what it's marketing most successfully lately is its stock.
AT&T's full-bore stock-promotion campaign explains why the company announced yesterday that it's creating a separate "tracking stock," to be called AT&T Wireless Group, that will be tied to--duh!--AT&T's wireless business. News of AT&T's plans, reported in the Nov. 22 Wall Street Journal but not confirmed by the company until yesterday, sent AT&T stock up almost 25 percent in just four trading days. (On the fifth day, the stock ran up some more, but that was because of a "buy" recommendation issued by an influential telecommunications analyst, Jack Grubman of Salomon Smith Barney, who had been bearish on AT&T for years.)
Why in the world would a tracking stock that changes absolutely nothing about AT&T's basic business add $35 billion to its stock-market value in just four days? As we used to say at Forbes magazine, it's the principle of "When the ducks quack, feed them." Or, as marketers say, give the customers what they want. Wall Street loves wireless companies and it also loves tracking stocks, which are securities tied to a particular business within a company. A wireless tracker? Such a deal.
AT&T biggies have been grumbling for months, because the company's stock had been trading in the 40s even though Wall Street analysts valued AT&T's assets at $60 to $70 a share. So AT&T is scattering duck food, trying to put its stock on the fast quack.
The fact that companies cater to Wall Street's ever-changing whims isn't exactly news. But AT&T's providential rise from $46.56 1/4 on Nov. 19 (the last market day before the Journal story) to $57.43 3/4 on Nov. 26 came at a very convenient time. For starters, through Nov. 19, AT&T had way underperformed arch competitor MCI WorldCom. AT&T's stock had fallen 8 percent for the year, while WorldCom's had risen 26 percent. The surge closed most of the gap. For companies like AT&T and WorldCom, stock price is more than just a way to keep score.
These companies use their stock as currency, to make acquisitions. The higher your stock price, the easier it is to make big-ticket purchases. Issuing stock is how AT&T can pay more than $100 billion for cable-TV companies and WorldCom can pay $115 billion for Sprint, the big long-distance and wireless company. If your stock is down and your competitors' shares are up, you're at a disadvantage.
In addition to these motives, AT&T is approaching a point where failing to keep its stock price up will cost it money and prestige. That's because of the way it structured the pending takeover of MediaOne, the big cable-TV company. When AT&T made a cash-and-stock deal in April to buy MediaOne, it agreed to fork over extra money if AT&T stock were below $57 shortly before the transaction closes. Each dollar that AT&T falls below $57 forces AT&T to shell out about $625 million of real cash money to MediaOne's shareholders. AT&T's maximum exposure is $5.70 per AT&T share, a total of about $3.6 billion. But there's a potential cost of more than money: Having to fork over cash because your stock hasn't held its value doesn't exactly encourage people to take your stock in the next deal. And the way AT&T is going, there's always going to be a next deal.
I'm not accusing AT&T of trying to manipulate its share price to avoid shelling out extra cash for MediaOne. I think if AT&T wanted to do that, it would have timed its tracking announcement for late January or February rather than December. That's because AT&T hopes to close the MediaOne deal in March or April, and its stock will be valued based on its price for 20 business days before the transaction closes. This isn't the same kind of thing that Viacom pulled a few years back, when it needed to get its stock price up to avoid forking over more money and shares for "contingent value" securities it issued to buy Blockbuster. With AT&T having closed at $56.81 1/4 yesterday, AT&T doesn't need any more heavy lifting to get to 57. If things get tight, AT&T can always announce new layoffs or something to nudge its share price up a few bucks.
Please note that I'm not accusing AT&T Chairman C. Michael Armstrong of doing anything illegal, or even immoral. He's giving his customers on Wall Street what they want: a wireless tracking stock now, and the prospect of more trackers down the road if trackers stay popular. But having a widely followed company such as AT&T rise almost 25 percent in four days in reaction to financial engineering is almost comical. Close your eyes and you can practically see Armstrong strewing corn in the canyons of Wall Street. And you can sure hear a lot of quacking.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.