News: Analysis & Commentary: TELECOMMUNICATIONS
AT&T: TOP OF THE WORLD, MA
AT&T is in the global leagues now, thanks to IBM's network
It's easy to see why AT&T Chairman and CEO C. Michael Armstrong has had a tough time convincing Wall Street that he can turn the telecom giant into a growth company. Revenues inched up a meager 1.5% in 1997, to $51.3 billion, and are forecast to increase 2% to 3% this year. The reason is simple: Virtually all of the company's revenues are coming from the highly competitive and increasingly less profitable long-distance business. The ultimate insult came in early December when archrival MCI WorldCom Inc. surpassed AT&T in market capitalization, largely because investors think that MCI WorldCom is better positioned in the fast-growing data and international markets.
On Dec. 8, Armstrong's plan to break out of the slow-growth box became clearer: AT&T will acquire IBM's Global Network for $5 billion. When the deal is completed--probably in mid-1999--the new business will give an immediate $2.5 billion bump to AT&T's top line.
More important, the deal will give AT&T an international data network and 5,000 employees skilled in managing a vast array of network technologies. That should help AT&T attract telecom business from multinationals and win new outsourcing contracts for managing data networks. "We are now a global player," said Armstrong in an interview after the announcement. "We have redefined ourselves from a domestic long-distance company into a global communications provider."
The Global Network acquisition caps a remarkable year in which Armstrong has struck several major deals to get a troubled AT&T back on track. In January, he agreed to buy Teleport Communications Group Inc. for $11 billion to get into local service for the U.S. business market. In June, he said he was buying cable provider Tele-Communications Inc. for $33 billion to get into the residential local-calling market. Although Armstrong has won plaudits for his bold steps, he is still far from proving that the deals will succeed.OVERPAYING? The latest acquisition dovetails neatly with a planned joint venture with British Telecom PLC. AT&T and BT had said they would spend $5 billion to build a high-capacity network in 100 cities; IBM's Global Network already has facilities in 93 of them. AT&T and BT still plan upgrades, but the IBM net will speed up its ability to attract customers. The market AT&T and BT are targeting is tantalizing: $20 billion to $30 billion a year and growing 10% to 15% annually, estimates the Gartner Group Inc. And the IBM Global Network "clearly positions us as the market leader in network operations," says Rick Roscitt, CEO of AT&T's outsourcing unit.
The benefits didn't come cheap. AT&T paid about $1 billion more for the network, which is burdened by old technologies, than analysts thought it should fetch. "Five billion dollars for a 1980s network is pretty expensive," snipes CEO Michael J. Mahoney of rival Viatel Inc., which is building a new network in Europe.
But Armstrong is stressing the growth opportunity, not the cost. And the Street is listening: News of the deal pushed AT&T's stock to 67, putting its market cap back ahead of MCI WorldCom's.By Peter Elstrom in New York