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Table of contents
1. Communications industry in the post-divestiture era: Not the expected results........................................... 1

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Document 1 of 1

Communications industry in the post-divestiture era: Not the expected results

Author: Brandi, Jay T; Srinivasan, S
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Abstract: If the Department of Justice expected the Regional Bell Operating Companies to reap significant
financial benefits from the breakup of AT&T, they were mistaken. A study of the breakup's aftermath reveals
that the overall financial performance of the post-divestiture period is not significantly better than that of the prebreakup AT&T.
Links: Linking Service
Full text: Headnote
Operating since 1900 as a regulated monopoly, American Telephone &Telegraph (AT&T) has provided
Headnote
local and long distance telephone service for practically the entire United States. The monopoly was broken on
January 1,1984, when AT&T divested itself of its local telephone companies to enter the emerging information
services market. The divestiture, known in the industry as the Modified Final Judgment, resulted in the formation
of seven regional Bell operating companies. These "Baby Bells" were authorized to provide local telephone
service. These authors examined the growth of telecommunications during the past decade from three
perspectives: technology, regulation, and comparative financial performance. They found that the industry has
adapted itself to a leaner, more consumeroriented corporate structure; regulators have not kept pace with
technological advancements, which has shifted some real competition; and the overall financial performance of
the postdivestiture period is not significantly better than that of the pre-break-up AT&T.
American Telephone &Telegraph (AT&T) was formed as a private concern in 1900. As a provider of universal
telephone service to almost the entire nation ever since, it has become an integral part of the American way of
life. Originally regulated by the Interstate Commerce Commission (ICC), AT&T has been regulated by the
Federal Communications Commission FCC) since that agency's 1934 inception as regulator of the
telecommunications industry. In fact, until 1984, and with the exception of GTE, the FCC primarily regulated
only AT&T, because all other telephone companies were effectively too small to make any impact in the
industry. In stark contrast to the prevailing regulatory approach followed in almost every other country in the
world, AT&T operated as a government-regulated, private company. In a majority of countries, the
telecommunications industry is treated as a government monopoly.
Before its divestiture, AT&T was a leader in introducing innovations such as "Touch-Tone dialing" and the "800number service." However, the lack of competition in the industry did not bode well for the customers of the
telecommunications giant. New product and service research was slow, and the time required to bring new
products and services to market was extremely lengthy.
Independent of the telecommunications industry, another major development was taking place in the early
1980s-the introduction of personal computers (PCs). In 1984, IBM entered the personal computer market and,
in a short time, made the term PC a common acronym. By 1984, there were nearly 16 million PCs in operation.
AT&T realized the potential of personal computers and envisioned using them to expand service offerings to
include information services.
Over time, AT&T lost several court cases as it fought to maintain its monopoly. Perhaps the best known is the
1969 case initiated by MCI, the nation's second-largest long distance telephone company. A court decree
issued in 1956, however, prohibited AT&T from offering information services.l Moreover, long-term antitrust
litigation between AT&T and the Department of Justice (DOJ) continued to be a costly problem for the

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monopoly. As a result of the DOJ suit, AT&T became convinced that the regulatory climate was not conducive
to its success in the information market. The suit was ultimately settled in 1982. As part of the final agreement,
known as the Modified Final Judgment (MFJ), AT&T agreed to divest itself of all local telephone service
effective January 1, 1984. In return, the 1956 decree was modified to permit AT&T to enter the information
services market. In addition, local telephone companies were prohibited from entering the information services
market.
Government policy aimed at upgrading competition in the market for long-distance telephone service prompted
the breakup of AT&T in 1984. The substance of this policy was that an increase in the number of competitors
would reduce long-distance prices-a probable result to which all good economists could attest. The question, of
course, that remained was whether those economists' assumptions would be correct. Another concern was
whether other issues might overshadow the ability or inability of competition to reduce longdistance prices.
Effective with AT&T's divestiture on January 1, 1984, seven new firms, known as the Regional Bell Operating
Companies (RBOCs), were established: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis,
Southwestern Bell, and US West. Table One designates the service areas these RBOCs cover. These RBOCs
developed and now support Bell Communications Research, a common research and development entity more
commonly known as Bellcore. By the terms of the DOJ agreement, AT&T was allowed to keep its manufacturing
arm, Western Electric Co., the Bell Laboratories, and its long distance telephone service. Table Two details the
financial status and the number of employees on January 1, 1984, for AT&T and the seven RBOCs.
From the RBOCs' perspective, the key components of the 1982 MFJ are:
no competition in their respective local service region
prohibited from providing long distance service
prohibited from manufacturing and selling telephone equipment
prohibited from conducting individual research and development within the company
authorized to provide connectivity to the long distance carriers to access local customers
Independent of the divestiture proceedings, another major development occurred in October 1983-the
inauguration of cellular telephone service in Chicago. The FCC approved two cellular service providers, one of
which was to be the RBOC in each region. Beyond this approval, the FCC did not regulate the cellular industry
in any way.
This article examines the impact of AT&T's 1984 divestiture from the perspective of growth. We consider each
of the companies involved and both the benefits provided and costs charged to consumers or investors. We
also focus not only on regulatory changes over the past decade and their resulting contributions to the shaping
of today's telecommunications industry, but also the advances in technology and financial performance.
Technology-Driven Growth
The competitive environment brought on by the AT&T divestiture can be directly identified as the impetus for the
research and design of many new products and services. The 1984 divestiture has fostered an era of
competition.
Even though there are only four principal long distance carriers-AT&T, MCI, Sprint, and Worldcom-consumers
currently can choose from nearly 25 long distance service providers. These 25 providers exist in addition to the
RBOCs that have been permitted to provide long distance service as part of the Telecommunications Act of
1996. To maintain their competitive position, all long distance carriers have installed fiber optic cables which
provide high bandwidth. The high rate of technological growth in service differs significantly from that of the
RBOCs. Because of competition, which the RBOCs do not have, long distance firms have, in essence, left "the
last mile" or local operations as "a dirt road on the nation's information highways."2 This situation will not
continue for long.

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Once all of the legal ramifications of the Telecommunications Act of 1996 are sorted out, many long distance
carriers such as AT&T might jump back into the local service market because it is a $70-billion industry.
Several utility and telephone companies now install high bandwidth fiber optic lines. In certain areas, electric
utilities have threaded these fiber optic cables through old pipelines to monitor energy conservation efforts.
Similar to telecommunications lines, these electric power lines have excess rentable bandwidth.
One new service that utilizes the new high bandwidth is the Integrated Services Digital Network (ISDN) which
integrates voice, data, and video communication. The ISDN can transmit information over two channels at
64,000 bps (bits/second) and send the control signals independently at 16,000 bps. This ability to send the
control signals separately offers numerous possibilities. For example, individuals can receive information about
the originator of an incoming call before they answer the phone. The service can be enhanced to provide the
name and phone number of the caller.
However, in a survey by Pacific Telesis, many customers pointed out that they often do not remember their
friends' phone numbers. Therefore, disclosing the phone number of the incoming call is of little value to them.
One reason for this problem, of course, is that many telephones already offer memory call features.
Consequently, many people may not even remember the telephone number of their closest friends because
they have never had to learn them.
Why, we might ask, were telephones with memory call and other special features developed? The answer is
simple. The competition to supply telephone equipment forced vendors to create features designed to make life
easier. Had it been left to AT&T before the divestiture, the firm's ingrained methodical process likely would have
inhibited a quick introduction of new telephone features. In fact, it took AT&T more than three years to cultivate
a new technology from concept to delivery. Today, the innovation life-cycle is 12 to 18 months. In the days
before the divestiture, the mindset of telecommunications firms was simply to inform customers about new
technology. Today, competition dictates that the firms design products when a customer need is identified.
One of the most controversial new services offered is Caller ID. Many consider the Caller ID service to be an
invasion of privacy. Once the caller's telephone number is revealed on the recipient's instrument, nothing can
prevent the continued use of that number. One creative solution to this dilemma might be to disclose only caller
names. Another feature developed after the divestiture-voice mailis popular today because of its variety of
options for callers. Voice mail generally is provided as a third party offering which means that it was not
developed by the telephone companies.
Another popular servicevideoconferencing-is made possible today by the availability of high-bandwidth lines.
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Usually, one can transmit television-quality pictures at only 1.5 mbps (megabits per second). However,
advancements in compression technology have made it possible to transmit good quality pictures at 384 kbps, a
level easily supported by the current infrastructure. A T1 line, for example, is a combination of 24 channels of 64
kbps, plus a control channel of 8 kbps, which gives it a total capacity of 1.544 mbps. The growth rate of T1 lines
alone between 1990 and 1994 is about 30 percent. Today, Tl lines carry not only voice and video signals, but
also data traffic. At the same time, newer technologies such as ADSL (Asymmetrical Digital Subfiber Line) have
made it possible to provide higher speeds on existing phone systems. It is estimated that between 1991 and
1995, the growth rate of data traffic culminated at about 32 percent, whereas the rate for video traffic should be
about 52 percent for the period. Because the demand for large data transfer is increasing rapidly, the firms now
have started to install T3 lines which can transmit at 45 mbps. It is estimated that by the year 2003, the growth
rate of T3 lines will exceed that of the T1 lines between 1984 and 1994.
The decade that followed the divestiture produced tremendous growth in the number of new telephone lines. In
1983, telephone service was available to 91.4% of American homes. During the last 10 years, the number of
households with phones increased by 11.5 million. Now, 94.2 percent of homes have telephone service. Reed
Hund, the chairman of the FCC, has stated a goal of providing telephone service to every household in the
country. This ambitious goal will be rather difficult to achieve, given the current regulatory structure. In addition,
the goal will be tough to reach because the cost of laying telephone lines to remote areas remains high.
However, cellular service offers one possible solution which might make 100 percent household coverage fairly
affordable to achieve.
Cellular telephone service was inaugurated in Chicago on October 15, 1983, exactly 78 days before the
divestiture. In a way, the decade of the divestiture closely matches the decade of growth in the cellular industry.
In 1984, there were fewer than 1 million cellular subscribers. Today, there are 13 million subscribers, and an
average of 9,500 subscribers are added daily. The FCC permitted the licensing of two cellular companies in
each of the seven regions of the RBOCs. In each region, one license was given to the RBOC that served the
region, and the other was open to competitive bid. In all, cellular companies have invested $12.7 billion to
modernize the system. Recent auctioning of the newer Spectra has facilitated the growth of the cellular industry
immensely.
In a recent study, Donaldson, Lufkin &Jenrette projected that, by the year 2000, there will be 16 million cellular
phones that will reach 95 percent of the U.S. population. Over the last decade, the FCC did not stringently
regulate cellular companies. Although it did allocate the cellular broadcast frequency, it did not regulate other
aspects including industry pricing structures, which have been dictated entirely by market forces. A financially
rewarding industry, the cellular market is growing annually at a rate of 30 percent. For example, in 1993, Pacific
Telesis generated $100 million from cellular telephone interconnections.
Cellular callers, however, have started to demand land-line quality and the ability to communicate while
traveling through tunnels, parking garages or airports. In other words, they request uninterrupted, reliable
service. In general, customer tolerance for problems is shrinking. Regarding the telephone as a principal means
of communication, customers have spawned a growth in cordless and cellular phones that, over the last ten
years, has been dramatic. These long-popular devices now are joined by personal communication servers
(PCS). PCSs give customers the convenience of a single, portable unit that provides both computing and
communication services. This innovative design consumes less energy than a cellular phone. However, this
technology has not yet caught the public's fancy.
Another new technology that is destined to play a major role is the asynchronous transfer mode (ATM). The
ATM technology transmits at very high speeds over long distances and can carry video, data, and audio in an
integrated manner. This technology provides opportunities for distributing movies to the home on demand and
has already brought about several new alliances in the industry. The technology is much more widely accepted
now than technology such as ISDN (Integrated Services Digital Network). Existing hardware capabilities are not
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quite adequate for the speed and band width that ATM can offer. Instead, the industry is adapting ATM to
slower speeds.
In collaboration with Time Warner company, US West is already conducting an ATM field trial in the Orlando,
Florida area. The success of this new technology could radically revolutionize both the television and
newspaper industries. As a result, consumers will have numerous entertainment options available from a wide
variety of providers.
The ATM technology will also greatly influence the health care industry. Its highly-reliable, high-speed data
transfer capability can bring the services of medical specialists to remote sites. A study conducted in 1992 by
the U.S. Department of Transportation shows that nearly 2 million full-time workers telecommute to work. The
same study projects that by the year 2003, the number of telecommuters may rise to 15 million.3 In part, this
growth will be attributed to the ATM technology.
Regulatory Control
Regulation and technology in the telecommunications industry have not meshed well. Similar to most regulated
industries, there are several reasons that the pace of technological innovation is far greater than the pace of
regulatory reform. First, there are many more technological innovators than regulators. In addition, the
regulators tend to be more cautious than technologists in their approach to innovation.
There are three kinds of regulations: standardization, antitrust, and economic. In telecommunications regulation,
standardization regulations attempt to deal with setting common standards for communications hardware and
the types of services offered. Antitrust regulations are enacted to correct market distortions created by certain
companies with financial clout and to outlaw agreements made by firms to distort competition. The focus of
economic regulations is the allocation of markets or resources.
There are two types of telecommunications regulators: the federal government's FCC and the state
governments' public service commissions (PSCs. The FCC and the PSCs are guided by congressional
legislation enforced by the courts.
The goal of the FCC and the PSCs is to provide low cost services and social pricing, which may not reflect the
true cost of services. In a recent study,4 the United States Telecommunications Association found that as part
of social pricing, the subsidy for providing basic telephone service to local users amounts to $20 billion annually.
This amount is nearly twice the total profit for the entire telecommunications industry.
As noted previously, all of the RBOCs were given monopolistic rights in their respective service regions. At the
same time, they were required to provide universal service in that region. However, in the long run, the FCC and
the PSCs may consider allowing competition at the local level. Such a policy should be disclosed and clarified
well in advance, and a transitionary period should be provided, during which the monopolistic form of service
could be gradually phased out. Unfortunately, no such policy has been announced. Instead, competitive access
providers (CAPs) have been allowed to operate in local service areas.
CAPs choose to operate in the high volume business market by connecting customers directly to long distance
carriers and bypassing local exchange carriers (LECs), as shown in Figure One. In 1984, there were no CAPs.
However, today there are nearly 30; the largest ones are Denver-based Teleport and Nebraska-based MFS.
MFS has announced a merger with Worldcom, which, if approved, will provide the first long distance carrier with
the ability to provide local service as well. At the same time, AT&T has filed applications in all 50 states to
provide local service.
CAPs are neither expected to provide universal service nor subject to pricing restrictions for their services.
Consequently, they are able to undercut the LECs in price and wean away large business customers,
government agencies, universities, and hospitals. The LECs currently charge more than CAPs for both business
service and toll calls in their regions. This is necessary for them to be able to subsidize basic services.
CAPs often take away the cream of the LEC's business which places excessive pressure on the LECs to secure
subsidy funds to cover the cost of local service. In this context, it might be more prudent for regulators to apply
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the "universal service" concept equally to all providers.

A recent decision by Judge Harold Greene, overseer of MFJ implementation, gave permission to the CAPs to
locate their switches adjacent to the LECs. Even though the CAPs now account for a very small amount of the
total business, installing adjacent switches in only 14 percent of the locations gives them access to 80 percent
of all traffic. If the CAPs capitalize on that concept, the LECs will be hard pressed to provide universal service.
Originally prohibiting long distance carriers from offering intraLATA (local access transport area) service, the
MFJ-defined LATAs are based on a "community of interest" concept, rather than area codes or state
boundaries. A state may have more than one LATA; currently, there are more than 300 LATAs in the continental
United States.
Passage of the Telecommunications Act of 1996 has lifted most of the restrictions of the 1984 Modified Final
Judgment Agreement. Both the FCC and PSCs are working on implementing the provisions of the new act
which was intended to usher in competition in the $70 billion local telephone service market. A recent court
ruling in favor of the RBOCs, however, will delay competition in the local telephone service market.
When the MFJ became effective in 1984, the United States Congress also enacted the Cable Act which
prohibits the RBOCs from offering video services in their own regions. This means that an RBOC such as
BellSouth cannot collaborate with a cable company in Atlanta or Miami but could, in fact, offer enhanced video
services in New York, Chicago, or Los Angeles by collaborating with the cable companies in those areas.
In a recent study, Wharton Econometric Forecasting Associates (WEFA) predicts that the removal of all MFJ
and Cable Act restrictions on the RBOCs can provide significant economic benefits. In particular, the WEFA
estimates that the removal of the constraints would:
add 3.6 million new jobs
increase consumer spending by an additional $137 billion
improve the balance of trade by an additional $33 billion
reduce unemployment by an additional 0.5 percent
add more than $247 billion to the total GDP
reduce the federal budget deficit by an additional $150 billion.
Given regulatory recognition of the current pace of technological innovation, the removal of artificial restrictions
on the telecommunications industry would allow U.S. technology to play a significantly greater role in the global
communications arena. Europe is already on the path to providing a single market with a common standard for
all communications. If the regulations in the U.S. hold back innovations, the country is likely to lose its
preeminence in the telecommunications market.
Financial Analysis
The January 8, 1982 agreement between AT&T and the DOJ resulted in an AT&T spinoff of 22 operating
companies. The division of the telecommunications giant created seven regional operating firms, and AT&T
retained Western Electric, (manufacturing), Bell Laboratories (research), the longlines, and customer equipment
departments. Theoretically, the purpose of the breakup was to eliminate AT&T's monopolistic control of the
industry. The expected result of introducing competition into the AT&T markets was a reduction of customer
costs because of more effective and efficient allocation of resources.
Two divergent interpretations of what has actually occurred have been offered. AT&T asserts that the result of
competition has been exactly the one desired and expected-price reduction. The RBOCs, however, suggest that
quite the opposite-competitor conspiracy-has occurred. Conflicting results also have been provided by various
empirical studies. Researchers William and Lester Taylor concluded that the "reduction in carrier access
charges paid by long distance companies to the local telephone companies" has provided the explanation for
"overall reduction in interstate long-distance prices and expansion of interstate demand. "5
Another analyst, however, suggests that the downward trend of prices has been a direct result of the divestiture
and competition.6 The latter's findings confirm those of Taylor and Taylor that savings "do not appear to have
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been passed on to consumers" and, he suggests, "neither competition nor divestiture has had any real effect on
long-distance rates."7
Inevitably, because none of the resulting eight companies had an individual corporate history, the breakup
caused major upheaval in the financial markets because of the lack of information or track records for any of
these surviving organizations.
Now, more than a dozen years after the spin off, which was effective January 1, 1984, a number of reports have
been published regarding whether the objectives of the divestiture have been effectively achieved. Our
investigation examines the performance of the pre- and post-divestiture firms from several perspectives
including operating efficiency, liquidity, leverage, and profitability.
An examination of the financial statements of AT&T, both pre- and post-divestiture, and the seven RBOCs
provides a number of interesting findings. The analysis compares the ten year pre-divestiture period (19741983) with the ten year post-divestiture period of 1984-1993.
The analysis suggests that, although AT&T does in fact face strong competition from several strong players in
the long-distance market, and customer prices have been reduced, investors and creditors do not appear to
have received benefits worthy of the significant costs associated with the divestiture. With regard to longdistance rates, in fact, as shown in another study, they have been exponentially decreasing not just for the past
ten years but for the past 80 years. This finding suggests that the divestiture itself is notnor is competitionthe
driving force in rate decreases. In addition, despite the competitive environment and numerous technological
advances, prices in the post- breakup period have not been reduced at a rate greater than the annual 4 percent
rate realized under the pre-split AT&T conglomerate.8
What changes actually have taken place? Consider first that although revenues for the post-split group
increased 35.6 percent between 1983 and 1994, the average annual rate of growth in those revenues was only
3.5 percent. By contrast, in the last ten years before the split, AT&T revenues increased 167 percent, and there
was an 11.5 percent annual growth rate. Therefore, despite all of the rapid and significant technological
advances in both products and services since AT&T was split on January 1, 1984, these results do not suggest
that it was beneficial to break their monopolistic position in the telecommunications industry.
More important, it appears that the expectation of improved asset allocation also has not been realized.
Theoretically, significant amelioration in resource usage should have resulted from the increased competition
caused by the DOJ agreement. A comparative assessment of the resulting performance data, however,
suggests that this actually did not occur.
Specifically, asset turnover and net margin (return on sales) for the postsplit firms averaged .56 times and 10.0
percent respectively; meanwhile, the pre-split AT&T averaged .41 times and 11.56 percent. In essence, the
turnover results indicate that the pre-breakup AT&T turned dollars invested in assets into only $.41 of sales, but
the postbreakup group turned them into an average $.56 of sales. However, the lower pre-breakup turnover was
effectively offset by a higher sales margin at the bottom line. These results-especially the margin increase
differential-appear even more troublesome when the significant increases in sales and advertising expenses, in
excess of $2 billion, over the post-breakup period are considered. These return-on-sales results provide further
verification of the breakup's failure to enhance efficiency or pass along savings. Further evidence that leads to
similar conclusions is illustrated by looking at the minor difference in the firms' operating ratios of 86 percent
and 82 percent for the postand pre-split firms, respectively.
The interaction of turnover and margin combined to provide an average return on investment of 4.6 percent
during the 1974-83 timeframe and 4.9 percent during the post-split era of 1984-93. Such differences appear
minor, given the costs associated with the divestiture and the fact that cost savings do not appear to have been
passed on to consumers in items such as lower long-distance rates.
It is important to note that the return on investment was calculated on an after-tax basis. This implies that it
includes the effect of both tax law and policy, as well as the amount of financial leverage undertaken by the
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firms. As a result, the returns presented are affected, in the case of the pre-breakup firms, by the higher level of
average debt exhibited. Although such leverage normally provides an enhancement of return, the high cost of
financial leverage during the late 1970s and early 1980s provided a reduction in the already high net margin
which impeded the normal magnification effect of leverage.
As previously noted, the observed financial leverage positions of the preand post-divestiture firms do appear to
differ somewhat. Pre-divestiture AT&T averaged 46 percent long-term debt as a percentage of capital; however,
the post-divestiture group averaged longterm debt of only 40 percent. As a result, and because of the high
interest costs associated with debt during the pre-split period, the pre-breakup firm also, on average, was able
to cover fixed charges only 2.57 times. Because of lower debt levels, and the reduced cost of debt after the
split, the post-breakup group was able to cover fixed charges an average 4.18 times.
To better assess the true financial risk over the two periods, it is important to also consider the issue of liquidity
as evidenced by measures such as the current ratio and cash flow per share. In the 1974-83 period, AT&T
appears to have taken on more financial risk, averaging a current ratio of only .74. This suggests that liquidating
all current assets at book value would provide coverage of only 74 percent of current debt obligations. The lessleveraged, post-split group showed a relatively higher level of liquidity at .87. However, cash flow per share was
markedly better for the pre-split firm. Over the period of 1974-83, AT&T was able to provide an average $15.40
of cash flow per share. The post-breakup group provided an average of only $6.70 cash-flow per share.
Although the original AT&T did have a higher level of debt and debt cost and further exhibited a lower current
ratio, in fact, it had a significantly higher ability to turn profits into cash flow which effectively managed its higher
level of debt.
Of course, the bottom line may be the real key to a verification of increased efficiency and profitability. For the
eight divested firms, net income after tax, on average, grew 20.3 percent over the 1984-93 period. However,
because of significant losses in four of the ten years, their average rate of growth was negative at -9.5 percent
annually. For the pre-breakup AT&T conglomerate, after tax income grew 81.3 percent over the ten-year period
1974-83. No losses were realized during the period, and the annual rate of growth in aftertax income was 6.8
percent.
On a per-share basis, annual earnings for the original AT&T averaged $6.42. By contrast, the post-breakup
group averaged only $ 1.92 in earnings per share per year. Although we cannot say with certainty that similar
results would not have been realized in the 1984-93 period had the breakup not occurred, such results do bring
the wisdom of the DOJ divestiture agreement into question. As a result of the higher level of financial leverage,
and the higher growth rates in sales and net income, the earnings yield of the pre-divestiture firm was higher
(12.5 percent) than that of the post-divestiture group (8.7 percent). This finding agrees with the perceived higher
levels of risk generally associated with additional increments of debt and growth.
Perhaps the financial characteristic most important to utility stock investors is the dividend yield. The pre-split
AT&T averaged 8.2 percent yield with a range of 6.7 percent to 9.9 percent. The post-split companies, with a
lower yield range of 4.2 percent to 6.29 percent, averaged a yield of only 5.8 percent.
The information conveyed by these findings with regard to earnings, cashflow, and dividend yield do not appear
to be imbedded in the stock prices of these firms over the periods studied. Despite its relatively better
performance over the pre-divestiture period, the pre-agreement AT&T stock price appreciated only 37 percent
and earned only a 3.73 percent annual rate of return. By contrast, the post-divestiture group posted a price
appreciation of 205 percent and provided an average capital gains yield of 8.3 percent. As a result, total return,
defined as the capital gains yield plus the dividend yield, to the pre-split AT&T investors averaged 11.9 percent,
and the post-split total return average was 14.1 percent with the majority of return coming from price change
rather than dividend yield. Although the dividend yields and total returns of the post-split group are still at levels
indicative of dividend stocks, it does appear that the firms created by the DOJ agreement are more like growthor total return stocks-than the AT&T stock of the 1974-83 period.
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The stock volatility measures of the respective stocks corroborate our conclusion that the stocks of the
postbreakup group trade more like growth stocks than income stocks. The stock volatility measure is defined as
Volatility Measure = (High Price - Low Price)/ [Low Price + High Price)/2]. Over the ten-year pre-split period,
AT&T exhibited an average volatility measure of only .21, but the post-split firms averaged a measure of .31.
This indicates that the stock price of the pre-divestiture AT&T, on average, was less volatile than were the stock
prices of the post-divestiture group. This finding is further substantiated by the fact that no single postdivestiture firm exhibited a volatility measure lower than .27. These results indicate that, along with the higher
price appreciation exhibited by the post-divestiture stocks, there was a significantly higher level of stock price
volatility or market risk.
Mixed Divestiture Results
Telecommunications is a principal driver of economic growth. We can no longer treat telecommunications as the
utility it was a decade ago. It is now a more strategic industry with both a big stake in-and a significant effect onthe country's economic growth.
Divestiture has brought competition to the industry. Customers have come to expect consistent and
uninterrupted service between one type of telecommunications service and another, with simultaneous
maintenance of flexibility of location. Currently, we all endure the plethora of numbers that one has to remember
for business voice, data, facsimile, cellular, and residential telephones. The day is fast approaching when we
will need only a single number-one that will accompany a user indefinitely. The technology already exists to
provide this service, and the infrastructure is now being strengthened to support its eventual volume. Regulators
should be ready to meet these technological advances. A major step in this direction was achieved by the
passage of the Telecommunications Act of 1996.
To summarize the findings of our financial analysis, pre-breakup AT&T realized higher rates of growth in sales
and higher net income after tax than the post-breakup AT&T and the RBOCs. The pre-divestiture firm also
exhibited a higher level of financial leverage than the post-divestiture group.
During the 1974-83 timeframe, AT&T provided its stockholders both a higher reported earnings-per-share and
higher cash flow-per-share than the post-divestiture era. Not surprising, both the earnings and dividend yields
provided by the pre-divestiture monopoly also exceeded those of the postdivestiture firms.
Despite the high cost of debt during the 1974-83 period, the net margin, operating ratio, and rate of growth in
income were all superior during the pre-breakup period, as were earnings per share, cash flow per share,
dividend and earnings yields, and growth in revenues. Although the stocks of the postdivestiture group provided
a higher level of appreciation, despite lower margins and rates of growth in revenue and income than the predivestiture firm, they also provided a relatively higher level of market volatility or risk.
Although the findings are somewhat mixed, the small differences between the areas in which the post-split firms
outperform the pre-split AT&T, and the large differences in measures in which the original AT&T outperformed
the divested firms lead us to believe that from a financial perspective, pre-divestiture AT&T outperformed the
post-divestiture group. In addition, we observe that long-distance rates had been exponentially decreasing for
80 years, not just the last ten, which suggests that technological change-not competition or divestiture-has
provided rate reductions. Therefore, the financial objectives of the DOJ agreement have not been realized.
References
1 United States v. Western Electric Co., 1956, Trade Case, 68,246 (D.N.J.). 2 Allen, Robert E., "A View of
Divestiture, Ten Years Later," IEEE Communications Magazine, 37(12), December 1993, 18-19. 3 Council on
Competitiveness, "Vision for a 21st Century Information Infrastructure," May 1993. 4 Sodolski, John., "Public
policy must maintain fair competition as its goal,"IEEE Communications Magazine, 37(12), December 1993, 6567. 5 Taylor, William E., and Lester D. Taylor, "Postdivestiture Long-Distance Competition in the United States,"
American Economic Review, 82(2), May 1993, 185-190.
6 Hall, Robert E., "Long Distance: Public Benefits from Increased Competition," Applied Economic Partners,
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Menlo Park, California, October 1993. 7 Noll, Michael A., "The Split-Up Worked. No, It Didn't," The New York
Times, January 23, 1994, 13.
8 Noll, Michael A., "Comment: A Study of LongDistance Rates-Divestiture Revisited, Telecommunications
Policy, 18(5), 1994, 355-362.
AuthorAffiliation
JAY T. BRANDI, Ph.D., is an associate professor of finance and executive director of the School of Business,
College of Business and Public Administration, at the University of Louisville, in Louisville, KY. He teaches
AuthorAffiliation
corporate finance, investments, portfolio management, and special finance courses at both graduate and
undergraduate levels. He is also a financial consultant and expert witness in litigation. Previously, he was
AuthorAffiliation
the assistant director of the Florida Division of Securities and a registered lobbyist
AuthorAffiliation
S. SRINIVASAN, Ph.D., is a professor of computer information systems in the College of Business and Public
Administration at the
AuthorAffiliation
University of Louisville, in Louisville, KY His research interests lie in the areas of broadband communications
and client/server systems. He has written articles for ACM and IEEE journals, Journal of Information Systems
AuthorAffiliation
Management, National Public Accountant, and the CPA Journal. He is a category editor for ACM Computing
Reviews.
Subject: Studies; Divestiture; Telephone companies; Impact analysis;
Location: US
Company / organization: Name: AT & T Corp; Ticker: T; DUNS: 00-698-0080;
Classification: 9190: US; 2320: Organizational structure; 8330: Broadcasting & communications industry;
9130: Experimental/theoretical treatment
Publication title: Business Forum
Volume: 22
Issue: 2/3
Pages: 50-57
Number of pages: 8
Publication year: 1997
Publication date: Spring 1997
Publisher: California State University, Los Angeles, School of Business and Economics
Place of publication: Los Angeles
Country of publication: United States
Publication subject: Business And Economics
ISSN: 07332408
Source type: Scholarly Journals

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Language of publication: English

Document type: PERIODICAL
Accession number: 01641892
ProQuest document ID: 210201244
Document URL: http://search.proquest.com/docview/210201244?accountid=35812
Copyright: Copyright California State University, Los Angeles, School of Business and Economics Spring 1997
Last updated: 2014-05-19
Database: ProQuest Central

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