PHONE PRANKS

By Daniel Kadlec

Forget all this stuff about global telephone wars, deregulation and anticompetitiveness. Policy wonks can ponder such issues all they want in view of the possible $50 billion merger of long-distance king AT&T with regional phone operator SBC Communications. Investors need consider only one thing to conclude that the deal is a loser: break-ups almost always are more valuable than megamergers, and AT&T's own history provides a storehouse of evidence. That this deal is even on the drawing board is more confounding than Dennis Rodman.

Recall that the old AT&T, the regulated monopoly known as Ma Bell, was busted into eight pieces in 1984. AT&T was granted the long-distance franchise, and seven Baby Bells were created to run local phone services around the country. Weakening Ma Bell's muscle made it possible for others to build competing services. But it left some 3 million AT&T shareholders vulnerable. Suddenly gone was a quintessential widow's and orphan's stock. In its place was a smattering of shares of eight different companies, all entering a brave new telecom world that promised upheaval and risk, not safety. The bust-up, though, has proved a resounding success for investors who simply did nothing. One hundred shares of AT&T the day before the court-ordered break-up was worth $6,052. Anyone who held on to those shares, along with all the new Baby Bell shares and their spin-offs, and reinvested all dividends would today own shares in 11 companies and have a package worth $58,396, according to a study by the brokerage Edward D. Jones. That amounts to an average annual gain of 18.4%, vs. 16.3% for the Standard & Poor's 500 in the same period. Few professional money managers have done so well.

The success of Ma Bell's progeny is no accident. A Penn State study found that the stocks of 161 spin-off companies between 1965 and 1990, on average, rose 76%, vs. a market average of only 43%, over three years. Why? Often spin-off companies become more focused, and because they are smaller they tend to have greater ability to grow rapidly. Meanwhile, there is little evidence that giant mergers create great wealth for shareholders. Just ask AT&T. It paid $7.4 billion for NCR Computer in 1991 and soon gave up on the acquisition, spinning it off to shareholders as part of another split, this one three ways, last year. So now somebody wants to put Ma Bell back together, replacing fruitful spin-offs with questionable mergers. That is what this deal--twice the size of any previous merger--is all about. SBC is the old Baby Bell Southwestern Bell plus the Baby Bell it recently acquired, Pacific Telesis. If the deal goes through, AT&T will have gathered two erstwhile independent carriers back into its fold. It's a short step from there to continue to buy. Might it be a good thing? Well, maybe. Global competition is a reality. It may just be that one huge American phone company is what it will take to match wits with British Telecom and Nippon Telephone in the year 2525, if man is still alive. SBC brings proven phone-company management to the party, which might help sell the deal. What we know for sure, though, is that in the '90s every Baby Bell stock has outperformed AT&T. I'll take spin-offs over spin any day.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at [email protected]