One of these deals, of course, was Time Warner’s proposed merger with Turner Broadcasting to create the world’s biggest media company. Because details have been leaking for a month, this deal was about as surprising as Sports Illustrated putting a pneumatic woman on its cover in February. The other deal was AT&T’s shocking announcement that it would voluntarily split into three separate companies. Time Warner and AT&T expounded endlessly on their visions. But their records – as opposed to their rhetoric–raise major doubts about their ability to back up their words.
Let’s start with the fun couple of Time Warner and Turner. Time Warner needs more businesses the way a bald man needs a hairbrush. The company’s biggest problem now is coordinating what it already owns. With minor exceptions, the six-year combo of Time Inc. and Warner Communications has never gotten its act together. The company has been plagued by huge debt, corporate infighting and changes in direction each time embattled chairman Gerald Levin senses a shift in the wind. Now you and Turner Broadcasting to this inchoate mass and expert Time Warner to become a more focused company. Good luck. It’s like figuring that if you dump enough bricks somewhere, you’ll wake up one day and see a beautiful building. Ted Turner will obviously be Time Warner’s loudest voice after the deal (page 60). But despite being a media genius, Turner tends to get carried away. Among other missteps, Turner overborrowed to buy MGM in the 1980s and came close to losing control of his company to MGM’s former owner, Kirk Kerkorian. Turner raised money from Time Warner and TeleCommunications Inc. to keep Kerkorian at bay, but had to give them veto power and a big piece of the action.
(Before we proceed to AT&T, some disclosures: NEWSWEEK competes with Time Warner-s Time magazine. And I’m paid by Turner Broadcasting’s CNN for appearing once a week on its “Business Day” show.)
Back to the main event. While the Time Warner-Turner stumbling blocks are obvious, the obstacles to AT&T’s plan are less apparent. AT&T’s strategy makes a lot of sense, in contrast to Time Warner’s. But making the strategy work is going to be a bear. For starters, AT&T is asking the same guys who preside over the problems to fix them. And the deal won’t be done until late 1996 at the earliest. So for at least 15 months, many of AT&T’s 303,000 employees will be worrying where – if anywhere – they fit in the new scheme of things. That won’t help them concentrate on business.
Wall Street decided that at Time Warner, more is less. Time Warner shares are down about 6 percent since the companies confirmed they were talking. That’s because Time Warner would issue tons of new shares. At AT&T, less is more. The stock market reached out and touched AT&T’s 2.3 million shareholders, adding almost $10 billion to the value of their stock the day the deal was announced. This despite the fact that AT&T took a $1.5 billion loss on its computer business, and that we won’t know until 1997 if the new long-distance, equipment and computer companies will be better than the current AT&T,
AT&T chairman Bob Allen was praised to the skies, as if the deal were done and already successful instead of just starting out. All that was missing was a parade down Wall Street in Allen’s honor, with analysts and stockholders strewing rose petals in his path. But before we enshrine Allen among America’s business greats, let’s look at the monumental mess that AT&T is burying as part of the reorganization. To wit: the debacle at AT&T’s computer operation, which has cost shareholders billions of dollars and will cost at least 8,500 people their jobs. Why be a skunk at the garden party? Because while we don’t know how well Allen’s dramatic restructuring plan will work out, we do know how Allen’s first big deal worked out. Terribly. AT&T’s purchase of NCR Corp., a giant computer company, ranks among the worst deals since God invented money.
Allen said at a news conference that AT&T wants to split up to make the new companies more responsive to customers and to eliminate the staggering cost and management energy AT&T currently devotes to keeping the businesses from tripping over each other. Splitting off the equipment business is a great idea. Many phone companies don’t want to buy equipment from AT&T, which they view as a competitor, but will buy from the new, yet-unnamed company if it’s not part of AT&T.
But the computer business? Gee, wasn’t it only four years ago that Allen, in his first dramatic move as AT&T chairman, spent billions to buy most of what he’s now unloading? Yep. In 1991 Allen spent $7.5 billion to buy NCR, a move that was opposed not only by NCR’s management but by some top AT&T managers as well. (AT&T denies this: I’ll stick with my sources.) Allen wanted NCR to fix AT&T’s troubled computer operation. Why spend $8 billion instead of cleaning up your own mess? That wouldn’t have been dramatic. And AT&T’s top managers might have had to fire people they knew and liked. This way, NCR would do the job for them.
What has AT&T gotten for its $8 billion? A mess. AT&T’s computer business has lost $144 million (before taxes) since AT&T bought NCR in mid-1991. That doesn’t count the aforementioned $1.5 billion charge. Without NCR, AT&T would have higher profits and fewer shares outstanding. By my math, AT&T would have earned about $2 per share for the first half of 1995 without NCR rather than the reported $1.61. That’s a 25 percent difference. Even when the computer business was profitable in 1991 and 1992, it dragged down per-share profit. And that doubtless dragged down AT&T’s share price.
To be fair, most old-line computer companies have had big problems the past few years. NCR might have had trouble even if AT&T didn’t own it, but we’ll never know. Managers bailed out en masse, afraid AT&T would meddle in their company, which it did in 1995. Among other foolishness, AT&T changed NCR’s name to AT&T Global Information Solutions. Very New Age-y, but sort of meaningless. So much for AT&T’s promises to respect NCR’s corporate culture. And to keep its hands off a business that it knew it didn’t understand.
Things are so bad at NCR – oops, AT&T Global Information Solutions–that AT&T will spend big bucks to make the company strong enough to give to AT&T shareholders. “Our objective is to fix that operation, make it viable and spin it off to our shareholders,” Richard Miller, AT&T’s chief financial officer, said in an interview. Miller said that AT&T would cover out-of-pocket for the big write-off. He said that would be less than $1 billion, but declined to be precise.
Let’s not get into the details of how AT&T, a superb marketing outfit, is unloading the computer business in a way that makes it impossible to calculate its overall loss. Or how Allen, who wouldn’t talk to me, declined to admit at his press conference that buying NCR had been a mistake or to express regrets about putting thousands of employees on the street. You don’t expect Allen to commit ritual suicide or to act like a wuss when shareholders may be watching. But you would like to see some sign he knows how much his NCR mistake has cost in people’s lives and shareholder dollars.
Meanwhile, Ted Turner and Gerry Levin talked about teamwork at their own news conference, but you could see Levin wince when Turner launched into one of his customary tirades on subjects ranging from CBS’s Larry Tisch to the movie business. Didn’t look like teamwork to me. Nor does the fact that Time Warner’s biggest partner, U S West, is suing to block the deal, and some Turner directors are screaming it’s unfair. The moral? Before you pop the champagne corks, look at the record. These guys are paid to look and sound great. But as always, actions speak louder than words.
