Two Books on AT&T

End of the Line: The Rise and Fall of AT&T by Leslie Cauley
Grade: C

I managed to finish this book because the story is captivating, but the book definitely is not. The analysis is superficial, and Cauley clearly runs out of new things to say so she ends up repeating the same things over and over and over again. As one example, she mentions AT&T strong balance sheet (pre-Armstrong) a half dozen times, and even gets it wrong - on one page, she says AT&T long-term debt was $126 billion; elsewhere she says $12 billion. Her description of the personalities involved is likewise superficial and repetitive. She mentions Armstrongs "Big Blue way of looking at things" at least a dozen times (I am not exaggerating). There's even a entire discussion (regarding negotiations with Time Warner Cable) that is given in its entirety twice (pp. 189 and 190).

Another serious complaint is that the language of the book is inappropriately informal for the subject matter, even downright vulgar in a couple of places. Her very poor writing style just adds to the book's generally sloppy impression. This impression is not aided by the careless errors that pepper the book (e.g., referring to Microsoft as a cable giant). Didn't anybody edit this thing before it hit the shelves?

Most annoying of all is the approach of following parallel lines to that fateful summer of 2000, then backing up to follow another line of thought. It seems to be an attempt to highten the drama, but it fails miserably. A chronological order would have made the story much more interesting as well as making it much easier for the reader to figure out what went wrong with AT&T and maybe learn something from the book. But perhpas this is just as well since Cauley's research would not have been up to this task.

I bought this book expecting some new insights, but there was nothing in here one wouldn't already know from reading the Wall Street Journal as the collapse was happening. Cauley simply did not do any homework or dig beneath the surface in the least. Overall, a very weak effort.


Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars by Dick Martin
Grade: D-

The back cover says that this book is "an up-front seat for the roller coaster ride" and a "look at how a great company tumbled" that will give us a "tour of AT&T's wild ride" and "chart the dissolution of an American icon." Not one of those comments is even remotely warranted.

I was expecting to find interesting insider discussions of important questions like:

• Did AT&T make any mistakes during the "trivestiture" in January 1996 (akin to giving away the wireless licenses to the RBOCs in the 1984 breakup)? Martin doesn't say, beyond talking about the PR fallout of the layoffs. These layoffs were only a side issue of the broader business strategy; communication mistakes surrounding them hardly merits mentioning at all.
• Was pursuing cable the right strategy for Armstrong to implement? Probably, but Martin doesn't weigh in on this.
• Did AT&T overpay for MediaOne? Of course, but again Martin is silent.
• Did AT&T further compound its cable problem by putting poor executives (first Hindery and then Somers) in charge of broadband? Not a peep.
• How should AT&T have handled the $2 billion @Home acquisition? Silence.
• Were all these problems unavoidable due to AT&T's pre-1996 succession planning problems? The only aspect of this question that Martin bothers to discuss is the PR fiasco surrounding Walter's departure. As if that were the most important aspect of AT&T's succession problems. He strikes me as having an exaggerated sense of his importance to the organization.

AT&T was a corporate icon for 130 years and had 4 million stockholders. Surely there were "hard lessons learned" as the subtitle claims, lessons that are valuable in the broader context of the modern corporation. However, from reading this book you would get the impression that AT&T's only mistakes were in communications. Martin gives us an incredibly myopic view of just the PR efforts related to AT&T's various missteps. Outside the PR business, who cares? Nobody! This could (indeed should) have been the business book with the broadest appeal in a decade. Instead we got a book that only PR people could stomach. It was so monumentally boring it literally put me to sleep more than once. I bought this book to read about AT&T; if I cared about Martin's actions I would have bought his biography instead.

Despite naming the first chapter "Don't dance to the music of your own buzz" it seems that Martin has done exactly that. His book is the ultimate example of form over substance, confusing the need to address important business questions facing AT&T with the buzz surrounding him and the mostly irrelevant matter of how the answers were communicated. Whether the answers were the right ones or not, Martin is unwilling (or more likely, unable) to say. If this book is an example of the caliber of executive thinking at the level of Executive Vice President at AT&T no wonder the company sank so far so fast.

Google Buys 5% of AOL

Google will invest $1 billion for a 5% stake in Time Warner's America Online unit. Google will become the only shareholder in AOL other than Time Warner. Google also will have "certain customary minority shareholder rights, including those associated with any future sale or public offering of AOL," the companies said in a statement.

Two thoughts come to mind:

(1) The writing is on the wall. Time Warner is slowly laying the groundword for a spin-off of AOL. It looks like it's 5% down, 95% to go.

(2) This values the whole of AOL at $20 billion. Interesting, very interesting! At its peak in December 1999, AOL had a market cap of $210 billion. Ouch!

Pepsico Market Cap Exceeds Coca-Cola's

Today, for the first time in history PepsiCo's market cap ($98.4 billion) closed above Coca-Cola's market cap ($97.9 billion). Symbolic? Yes. Meaningful? That depends on whom you ask.

Source: AJC

Nikkei breaks 15,000

The Nikkei finished up 258.35 points at 15,130.50, its highest close since Dec. 13, 2000. Yesterday ir briefly rose to 15,013.24, climbing above 15,000 for the first time since Dec. 14, 2000.

I ran across the most interesting graph of the Nikkei (see page 1). It overlays the period 1982-1992 for the Nikkei against the period 1992-2002 for the S&P500. The similarity is uncanny. However, there seems to have been a divergence after 2002 with the S&P recovering after 2002 while the Nikkei remained in a 12-year funk in the period 1992-2004.

While I don't think we will return to the returns that people came to expect from the S&P, I also don't think we are headed for a prolonged slump like the Nikkei experienced. A big reason for the Nikkei's decline was the Japanese practice of cross-holding where two companies doing business together would cement the relationship by buying large chunks of each other's stock. At the peak in 1990 more than half of the Nikkei's market cap was cross-held. As the slump began, companies began dumping their cross-holdings exacerbating the market decline. By the time the market hit bottom, less than 20% of the Nikkei's market cap was cross-held. This much healthier number is probably part of the reason that the Nikkei has been able to stabilize and start climbing again.

More on Real Estate

I was waiting for my rental car at the counter this afternoon when I overheard one of the clerks talking to another about how she had bought a 6 bedroom / 4.5 bath house for $600,000 because she could turn around and sell it for $800,000.

The end (of the real estate boom) is near!

When people start thinking that they can make a guaranteed 33% profit (I don't know what timeframe she was thinking about, but I'm sure it was as ridiculously short as the gain was ridiculously large), it is time for sensible investors to stay clear of real estate. This is definitely starting to sound too much like the irrational exhuberance regarding stocks in 1999-2000 for my comfort.

Most Successful Business Leaders?

Lessons from the Top: The 50 Most Successful Business Leaders in America by Thomas Neff and James Citrin

This book includes two convicted felons and one accused felon - Bernie Ebbers, Dennis Kozlowski and Ken Lay - as well as Hank Greenberg (who resigned from AIG in disgrace and may yet become the fourth felon in the book), Michael Eisner (who was recently ousted from Disney) and Mike Armstrong (who pretty much single-handedly managed the sinking of AT&T).

Now I know that hindsight is 20/20, but six stinkers (and some other questionable choices) in a list of 50?

A great read, highly recommended ... for the IRONY!

SBC Acquisition of AT&T Closed

SBC Communications announced today that it has closed the books on its $16.9 billion acquisition of AT&T immediately following its receipt of final regulatory approval.

It is worth noting that the new company going forward will use the AT&T name, iconic blue and white logo, and NYSE stock symbol (T).

Cisco buys Scientific-Atlanta in $6.9 billion deal

Source: Yahoo

Koch Industries buys Georgia-Pacific in $21 billion deal

Georgia-Pacific stock rose more than 36% to $47.28 in trading yesterday — close to the price offered by Koch.

Source: AJC

MCI-Verizon Merger Approved

MCI today announced the certified results of its shareholder vote that approved its merger with Verizon. The company said that the results show 64.6% of outstanding shares and 88.2% of votes cast were in favor of the merger. Also today MCI's Board of Directors declared a special dividend of $5.60 per share in accordance with the merger agreement. The special dividend will be paid on October 27 to shareholders of record at the close of business on October 17.

"Little evidence of a housing bubble"

A paper in this quarter's Journal of Economic Perspectives by Himmelberg (the Fed of NY), Mayer (Columbia) & Sinai (Wharton) says that their "analysis reveals little evidence of a housing bubble." We'll see if they know what they are talking about. Myself, I am skeptical myself since part of their analysis involves constructing new measures for evaluating the cost of home ownership because existing measures (which seem to indicate prices are exuberant) are not adequate. Whatever.

Ameriprise

American Express Company completed the distribution to its shareholders of all of the outstanding shares of Ameriprise Financial (the former American Express Financial Advisors).

Delta files for bankruptcy

Northwest too

Federated-May merger complete

Transaction closed today.

Third Union Is Leaving AFL-CIO

The United Food and Commercial Workers just became the third union to quit the AFL-CIO. The 1.3 million member union said it was committing itself to the new Change to Win Coalition, following in the footsteps of the Teamsters and the Service Employees International Union.

In addition to the UFCW, Teamsters and SEIU, the new labor coalition includes three AFL-CIO member unions (the United Farm Workers, Laborers' International and Unite Here) and the United Brotherhood of Carpenters and Joiners.

Source: Wall Street Journal

Who would fall for this?!

I have been getting these stupid flyers that claim "Buy stock XXXX, which is poised to skyrocket." It's a well-known variation on the scam; the only thing that has impressed me is the increasing quality of the production. One even posed as a 32-page investment magazine with a variety of articles, but if you actually looked through it, it was only pushing one particular stock.

Got another one today and actually took a minute to read through it. A footnote reads, "[The producer of the flyer] may hold positions in the company mentioned." Even more ridiculous, it discloses that, "The profile of XXXX is a paid advertisement by a third party shareholder to XXXX in the amount of 250,000 shares of stock that need to be sold to pay for the cost of this advertising." And most farcical of all we are treated to "The target price was determined arbitrarily."

Who would fall for this?!

Obviously, this scam works or they would have stopped sending me the flyers. But I am amazed to learn that there are enough people dumb enough to fall for this pitch to keep it alive.

What is even more unbelievable is that they obtained my name due to my Financial Planning Association membership. I have cancelled my membership not just for the obvious reason that I believe they violated their duty to take reasonable care with my information, but even more so because the FPA apparently has enough members who might fall for this scam to make them worth targetting.

Ford and GM Hurting

After a disappointing performance in the first half of the year, Ford Motor Company is considering cutting more salaried workers, a company spokesman said Friday. Ford spokesman Oscar Suris wouldn't confirm a report in The Wall Street Journal that said Ford may lay off up to 30% of its white-collar work force - about 10,500 of its 35,000 salaried workers - in North America over the next few years. But he noted that earlier this week, Ford CFO Don Leclair said "nothing is off the table" when asked about possible cuts during a conference call to discuss second-quarter earnings.

Ford already has announced plans to reduce its salaried work force in North America by 2,700 people by the end of this year. It also has said it will reduce the use of agency workers and other purchased services by 10%. But Suris said the company is considering even more aggressive measures. "We have operating challenges that include our cost structure and excessive production capacity, and we have plans to address that," Suris said.

Ford said it earned $946 million in the April-June period versus a profit of $1.17 billion in the year-earlier period. It lost $907 million in North America, down $1.4 billion from a year ago. Ford's U.S. sales were down nearly 4% in the first six months of this year.

So Ford made $1.853 billion on sales outside the US? Man, if they could somehow wipe their US operations off the face of the Earth, they would be on easy street!

Ford CFO Don Leclair said the automaker would no longer issue quarterly earnings forecasts. GM withdrew its earnings outlook for 2005 after reporting a stunning $1.1 billion first-quarter loss in April. Both GM and Ford have been hurt by a dramatic slowdown in sales of profitable mid- and large-size sport utility vehicles amid high gasoline prices. They are also struggling with higher borrowing costs following cuts in their debt ratings to "junk" status by the Standard & Poor's rating agency in May.

Yuan to fluctuate

China ended the yuan's peg of about 8.3 per dollar that had been in place since 1995 and will allow it to fluctuate versus an unspecified basket of currencies, the central bank said on its Web site. The new yuan rate strengthens the currency to 8.11 per dollar.

To Rein In CEO Pay, Why Not Consider Outsourcing The Post?

Outsourcing is the rage. It is possible to find qualified and cheaper workers to write software and perform other tasks in India, China, Taiwan, Turkey, etc. It makes competitive sense to outsource. Which leads to the following statement. Maybe it's time for American CEO's to include themselves in the outsourcing strategy. Certainly from a compensation standpoint it could be a great deal. US executives are by far the highest paid in the world, and their pay seldom has anything to do with performance. Directors give executives a boatload of money before they have done a lick of work. And when they fail, they are given another boatload of money so it doesn't hurt too much when the door hits them on their way out. If outsourcing the CEO's job isn't appealing, then what is the solution? Directors have to put a price tag on every single form of compensation so shareholders truly know what is going on. And directors have to stop rewarding incompetence. If a CEO is fired for screwing up, no more exorbitant severance packages.

(The Wall Street Journal, 19-Jul-2005, Midwest ed., p. B1)

Real Estate

Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don't require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan. [1]

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of crash that could plunge the economy into a recession. "When this market adjusts, it's going to be painful," said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. "Borrowers are getting in over their heads, and lenders are too."

The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios — in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association. Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, [2] said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.

[1] Yes, interest-only loans typically don't require payments toward the principal for 3-7 years, but at the end of this period eventually you *will* have to start paying down principal and/or re-finance your loan (either of which will result in a higher payment). Furthermore, we are in a period of historically low rates, and interest-only loans are generally variable-rate. So at the end of the interest-only period, rates will almost certainly be higher, causing payments to be even higher still. People are jumping into these loans under the assumption that their income will be substantially higher in 3-7 years; in most cases that assumption is unwarranted.

[2] Retirement investments or college funds would not be an altogether bad reason to do this. However, this statement is inaccurate. In most cases, the only reason people get into these loans is to buy a lot more house than they could otherwise be approved for (and often a lot more house than they can actually afford). Their payment is still a stretch, and any savings are used to finance current consumption not investing.