PRINCETON, N.J. -- Is Microsoft Corp.'s future really as bleak as yesterday's 14 percent drop in its share price would suggest?
Sure, the world's largest software company faces the possibility of a breakup because U.S. District Judge Thomas Penfield Jackson ruled that its business practices violated antitrust laws.Just consider, though, how investors fared when American Telephone & Telegraph Co.--also known as "Ma Bell"--split itself into a long-distance company and seven regional telephone companies, or "baby Bells," back in 1984.
In the three years before the court-ordered breakup of AT&T, the result of another antitrust case, the company's shares rose more than the Standard & Poor's 500 index.
Investors who kept all the shares they received in the split and in subsequent mergers, acquisitions and spinoffs saw the value of their investment rise more than the S&P 500 as well.
They now own stock in nine companies, including the renamed AT&T Corp. and the four remaining baby Bells: Bell Atlantic Corp., BellSouth Corp., SBC Communications Inc. and U S West Inc.
The other four are Lucent Technologies Inc., the world's largest producer of phone equipment; NCR Corp., a former computer maker that now develops database software; MediaOne Group Inc., a cable-television company that AT&T plans to acquire, and Vodafone AirTouch Plc, one of the world's largest wireless-phone companies.
Seven Become Four
AT&T's agreement to break up the Bell System followed a decade-long antitrust dispute with the U.S. Justice Department. The agreement prevented the company from re-entering the local phone business and prohibited the baby Bells from offering long-distance service--barriers that are starting to fall only now.
In the split, AT&T stockholders received one share in each of the seven baby Bells--Ameritech Corp., Bell Atlantic, BellSouth, Nynex Corp., Pacific Telesis Group Inc., SBC and U S West--for every 10 shares they owned.
SBC, called Southwestern Bell Inc. before changing its name in 1995, acquired two of its siblings for stock. The San Antonio-based company bought Pacific Telesis, based in San Francisco, for $16.5 billion in April 1997. It acquired Chicago-based Ameritech for $80.6 billion in October.
Bell Atlantic bought Nynex through a $26.5 billion stock swap in August 1997. In the process, the company shifted its corporate headquarters to Nynex's hometown of New York from Philadelphia.
Before the ranks of the baby Bells started shrinking, there were a dozen public companies that had ties to old Ma Bell: AT&T, the regional phone companies and four others that resulted from 1990s spinoffs.
Ownership Changes
Pacific Telesis completed the first spinoff in April 1994, when its mobile-phone business became AirTouch Communications Inc. The following year, U S West issued separate stocks for its phone and cable-TV businesses; the latter became a stand-alone company in June 1998 and adopted the MediaOne name.
AT&T spun off Lucent and NCR in 1996. The company formed Lucent to take over its Western Electric manufacturing business and Bell Laboratories research arm. NCR became independent five years after AT&T acquired the company for $7.4 billion; in the interim, it had billions of dollars in losses.
AirTouch lost its status as an independent company in June after Vodafone Group Plc, the U.K.'s largest provider of mobile-phone service, completed a $57.5 billion takeover. Shareholders received American depositary receipts of the combined company, renamed Vodafone AirTouch. Each ADR represents 10 shares.
MediaOne expects to go the way of AirTouch in the current quarter. AT&T offered to acquire the company for $64 billion in cash and stock last April. It will become the largest U.S. cable company after completing the purchase.
So where does all of this leave Ma Bell's old stockholders? Let's take the example of an investor who owned 100 AT&T shares before the breakup.
Share Breakdown
The investor still owns 100 AT&T shares--for the moment. Anyone who owned shares Friday will take part in a 3-for-2 stock split, the company's first since the baby Bells got their start. The split is payable April 15.
Among the regional Bells, the investor would own about 142 shares of Bell Atlantic, 180 shares of BellSouth, 333 shares of SBC and 41 shares of U S West, after adjusting for splits and takeovers.
Lucent would add about 130 shares to the total holdings. NCR would add just 6.25 shares, so the company would have repurchased the stock last May for a total of $264.38 in its "cash-out" of small shareholders.
Vodafone's purchase of AirTouch and subsequent split would add up to 100 ADRs and $360 in cash for the investor. He or she would also own 40 shares of MediaOne--a stake that would equal 38 shares of AT&T and at least $1,234 in cash under terms of the pending takeover offer.
These totals would be even higher if the investor purchased shares through dividend-reinvestment programs, because dividends aren't included in the calculations. Also, the statistics assume holders received stock, not cash, for fractional shares in every merger or acquisition.
Counting Returns
Let's look at the numbers another way--one that may be easier to appreciate. The value of one pre-breakup share of AT&T, assuming the NCR stake was intact, amounted to $126.53 at the end of last week. That compares with $7.42 a share at the end of 1983, just before the spinoff of the baby Bells.
The difference between those numbers equals an annual return before dividend payments of 17.5 percent, almost four percentage points higher than the S&P 500's return during the same period.
Between the beginning of 1981 and the end of 1983, AT&T's shares rose 29 percent. Although the three-year performance looks dismal by recent standards, it exceeded a 22 percent increase for the S&P 500 during the same period.
Since the breakup, AT&T climbed about 660 percent. Among the baby Bells, gains ranged from about 650 percent at Bell Atlantic to about 875 percent at BellSouth.
Lucent jumped more than 440 percent from the date of AT&T's spinoff, compared with a gain of just 19 percent for NCR. MediaOne gained 330 percent from the date of U S West's division into two stocks. Vodafone AirTouch's ADRs advanced 34 percent since the completion of the AirTouch merger.
Numbers such as those may give some comfort to Microsoft's investors as they consider whether a breakup is in their future.
David Wilson is a columnist for Bloomberg News. The opinions expressed are his own.