AT&T Case study Essay
AT&T Case study
1. Review AT&T’s past financial policies and financing choices. Were these appropriate for the nature of the business?
AT&T Corp., one of the largest companies in the United States, has had a long and storied history. Initially, AT&T operated as a monopoly, but in 1982, Justice Department, broke up the company into individual companies. Prior to divesture (in 1981), AT&T was the largest private company in the world and despite many challenges, AT&T remained an archetypical “widow-and-orphans” stock for a long time. The term “widows and orphans” was used to describe stocks with a relatively high degree of safety and dividend income and numbers from exhibit 1speak for themselves. By 1982 the company increased all its key financial indicators.
Revenues and operating earnings increased 12% and 6% respectively comparing to year 1981. In ten years, the company raised its revenues, net income, cash and assets more than 2 times. It`s worth to mention that AT&T was able to reduce its total outstanding debt by $ 725 mil and at year-end, the company`s debt ratio stood 42.3% down from 46.7% in 1980. In addition, AT&T neither cancelled nor lowered dividends, and only increased dividend per share by 10% annually. Aforementioned facts suggest that company`s financial policies and financing choices were appropriate for the nature of the business and that AT&T was one stable, reliable and profitable companies in the world by 1982.
2. In what fundamental ways will AT&T’s business change in the near future?
Throughout most of the 20th century, AT&T held a monopoly on phone service in the United States. In 1982, through an agreement between AT&T and the U.S. Department of Justice, AT&T agreed to divest itself of its local telephone operations but retain some of its businesses. The principal provision of the antitrust settlement was that the corporation would be split into seven completely independent regional corporations. Each regional company would continue to provide local telephone and other telecommunication services in addition to ability to sell telephone equipment. The remaining or new AT&T would focus on long distance, R&D and manufacturing arms.
3. In view of AT&T’s changing strategic and economic environment, what debt policy would you recommend? What other financial policies are appropriate for the “new” AT&T? What are likely to be the consequences of these financial policies?
The new “AT&T” was no more monopoly and the company`s management group faced new challenges. First of all, I think that when AT&T was monopoly, managers were averse to risk and led more financially conservative policy. After divestiture, it was clear that the external environment changed and effective actions needed to be taken to beat off intense competition. Moreover, there were several serious questions about future profitability of the new AT&T divisions (especially Western Electric) and it was not clear whether they would be able finance their operations in competitive markets. Taking into consideration above stated facts, at that phase I would recommend to shift gears from debt financing and switch toward equity financing.
In addition to the change in financial policy, I would also recommend considering a new acquisition strategy to reach more diversified portfolio and to broaden the company’s scope in other areas.