What a difference 20 years makes. In 1984, AT&T
I'll acknowledge off the bat that I'm not about to address the issue of price. Price is a big, complex, issue, but I think of it this way: Would I buy a Ferrari at a steep discount? I'd love to, assuming I had the capacity. But what about buying a rusted-out clunker for $150, half its blue-book value of $300? No way. Bargain or not, it's just not worth the collective hassle of storage, registration, repairs, etc.
Similarly, as an SBC shareholder, this transaction leaves me cold. Let me count the ways:
- Lame AT&T results: Two weeks ago AT&T reported an 11.6% decline in 2004 revenue. Gee, a negative growth engine. Even worse, EBITDA (basically operating income with depreciation and amortization expense added back in) margins declined 2.4 percentage points year over year.
- Lame SBC results: Its fourth quarter showed the "third consecutive quarter of positive revenue growth." Wow, three whole quarters. That performance may have saved the company from another year in the Pigs of the Dow, but it didn't save the stock from sinking 7.4% from where it was 52 weeks ago.
- So-so future for AT&T: For 2005, the company expects sales to decline 15% or more. 2004's free cash flow of $3.7 billion is great, but AT&T is a cash cow with a declining revenue base in a very competitive world.
- Meager combined growth: When Procter & Gamble
(NYSE:PG)announced its Gillette (NYSE:G)acquisition, it said their leading brands would produce $14 billion to $16 billion in revenue and cost synergies. Contrast that to SBC's vague declaration of "significant synergies," that the transaction would become cash flow positive by 2007 and the company would start delivering EPS growth by 2008.
- Earnings a distant prospect: Today's other big merger, MetLife's
(NYSE:MET)purchase of Citigroup's (NYSE:C)life insurance business, will be immediately accretive to earnings. Ah, earnings -- and the MetLife transaction will close in 2005. Contrast that to 2008 EPS growth and a first-half of 2006 closing -- a closing that is so far away that you have to wonder how you keep AT&T, with its knack for growing a business smaller and smaller, from really stubbing its toe and turning itself into a Lilliputian.
Analysts had expected SBC's earnings to be down slightly in 2005 before recovering smartly in 2006. Investors, like me, planned to enjoy the tempting 5.5% yield while we waited for the company's underlying earnings strength to return.
Ask yourself this: What does SBC know about running AT&T when it cannot get quarter-after-quarter, year-after-year revenue growth out of SBC's core assets? I cannot answer that, so I am voting "No" for this merger to AT&T -- a company with a proven record of declining growth.