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December 8, 1999

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Subject:  S'pose, just s'pose...
Author:  Scollag

Woe, woe, and thrice woe! There is much wailing and gnashing of teeth in Fooldom.

Many Fools here seem to be perplexed, to say the least, about what is going on. I hope I might place some perspective on the current situation. Let's look at one version of the Big Picture.

Warning: What follows is pure speculation. Put the cat out, gird up your loins, and stock up the bunker while conspiracy theory reigns awhile.

We are all painfully aware that ATHM's stock price has underperformed for a number of months, and as small investors we feel indignant at the injustice of our company languishing while others ride a stunning bull market. But remember that the proportion of ATHM that we outsiders own is collectively around 20-26% of the equity (my apologies if this figure and others in this post are imprecise - I have lost track of the exact figures since the Excite dilution, not to mention the effect of the partner rollout performance warrants). So, the parties that hold the other 74-80% must also be feeling less than happy, I would think. As I recall, AT&T's equity stake is around 26-28%, although it holds around 53-56% of the voting rights due to the weighting of Series B stock. That leaves around 46-54% in the hands of the Other Stockholders, including Comcast, Cox, Cablevision, and KPCB.

We are all aware, I hope, that AT&T had to cede a board veto right about six months ago, as a result of failure to meet TCI's original rollout schedule. This, and the voting rights in the low fifties per cent, leaves AT&T's level of control in jeopardy. AT&T cannot afford any further dilution without potentially losing control of the destiny of ATHM. As it is, I suspect that the veto is severely cramping AT&T's style. Remember, Armstrong has the Vision Thang, and he must find it particularly frustrating to have to achieve consensus among the relatively staid (dare one say conservative?) cable partners.

"AT&T is frustrated by the intransigence of its cable partners, because it has plans for ATHM beyond mere cable..."

Now, let's see� AT&T is frustrated by the intransigence of its cable partners, because it has plans for ATHM beyond mere cable, yet the partners don't want to know if it ain't coax. AT&T may still be in the driving seat, but someone else's foot is on the brake. AT&T desparately needs to consolidate its voting rights - and ideally to eliminate that pesky board veto. How can AT&T recover complete control?

What are its bargaining chips?

Old hands on this board will undoubtedly recall the speculation, around the time of the Excite merger, that AT&T would ultimately fold Worldnet into ATHM as part of the "all device, everywhere, all the time" strategy. Of course, this would require a transfer of equity, and AT&T would presumably need to be paid in some form. Cash would work, but so would a great big chunk of ATHM equity. Do you see where I am going with this?

Let's suppose that for the last several months there have been "discussions" between AT&T and the main cable partners (Comcast and Cox) about the potential value of Worldnet to ATHM. Let's further suppose that Comcast and Cox have not yet seen the light, and are ready to veto any attempt by AT&T to force an acquisition of Worldnet - at least at the price AT&T wants.

What, in this hypothetical situation, might "persuade" the cable partners to do what AT&T believes is the Right Thing?

Well, let's just say that a languishing stock price does not particularly harm AT&T's case, and has the further benefit of increasing the size of the equity stake that AT&T could aim to negotiate in exchange for Worldnet (cheaper share means more shares for a given $ value).

Stock price matters in both the internet and cable industries, since companies use their own stock as currency in mergers and acquisitions, and the cable industry is going through a phase of rapid consolidation. To return to an earlier point, Comcast and Cox must certainly be as disappointed with ATHM's stock performance as we Fools, because they might reasonably have expected their own stock prices to reflect increases in the value of their ATHM assets.

Could AT&T manipulate the stock price to keep it in a low trading range? Presumably the relatively low float would make any such effort easier, but, as I understand it, any direct intervention in the market would almost certainly be illegal, and a serious breach of fiduciary responsibilities. No, I'm not making accusations - just observations. A company the size of AT&T must command a heckuva lot of influence in the market, though.

Other Fools have observed that events of the last week appear to have been handled in a very ham-fisted manner in PR/IR terms - and this from two companies that normally excel at handling press. I tend to agree, and I find myself thinking that this could have had an effect on the stock price. Come to think of it, that whole Hindery controversy, and the alleged talks to AOL, were all PR mis-steps. In fact, when did we last see any real solidarity between AT&T, ATHM, and the cable partners?

"...any direct intervention in the market would almost certainly be illegal, and a serious breach of fiduciary responsibilities."

Let me repeat that I am not levelling accusations of wrong-doing at AT&T. But I think I have shown that it could be in AT&T's interest for the stock price to "consolidate" for some period. And sometimes, to paraphrase Edmund Burke, all that is required for a stock price to languish is for a major shareholder's PR operation to be concentrated elsewhere at critical times.

Having laid out the theory, what is the evidence? These points may be circumstantial, but together I think they deserve some consideration:

First of all, the announcement of the million subscribers milestone having been passed earlier than the most optimistic predictions was swamped by news emanating from�AT&T. OK, OK, maybe this was coincidence, and AT&T had those announcements planned for weeks while ATHM's news was more spontaneous. Maybe.

Secondly, look at what AT&T actually announced. I don't even mean the Mindspring non-event, because the wireless tracking stock was the really significant point. Sure, it makes perfect sense to realise the asset value of the wireless division by spinning off 20% of a tracking stock - so why not do the same for the broadband and internet services division? Could it be because AT&T still anticipates some further restructuring in that area?

Thirdly, in retrospect the rumour mill about a potential AOL deal could have been stamped on firmly by AT&T some months ago - in fact I now understand that that was what Hindery tried to do, but on incomplete information. The persistence of these rumours does not seem to have helped the stock price much, as FUD has reigned.

Fourthly, it has gone largely unremarked that ATHM is to issue a convertible bond to pay for the BlueMountain acquisition. As we know, ATHM has in the past issued stock or warrants rather than bonds. Could it be that the last thing AT&T will contemplate at present is any further dilution of its own ATHM stake - at least until it is restored to more dominant levels?

I have one final observation. It is by no means unknown in the telecoms business for the major partner in a consortium to play very tough with its partners. I have seen this at first hand, and Fools may care to glance at the sad tale of Iridium as another example. No, I am not suggesting that AT&T will wreak anything like that level of damage, but in that industry "holding their feet to the fire" is a useful aid to negotiation.

It is worth remembering that AT&T's interests and ATHM's do not always coincide. But that is another post.

Of course, I could be utterly wrong about all this. But those of you who have persisted to this point may agree that this theory addresses some of the more puzzling aspects of ATHM's situation and of AT&T's attitude. Perhaps more importantly, it advances the hope that harmony might be regained reasonably easily. Let's hope, eh?


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