AT&T Break up

_______________________________________________________________ _______________________________________________________________ Report Information from ProQuestJuly 15 2015 15:29_______________________________________________________________ 15 July 2015 ProQuestTable of contents1. Communications industry in the post-divestiture era: Not the expected results........................................... 115 July 2015 ii ProQuestDocument 1 of 1 Communications industry in the post-divestiture era: Not the expected results Author: Brandi, Jay T; Srinivasan, S ProQuest document linkAbstract: If the Department of Justice expected the Regional Bell Operating Companies to reap significantfinancial benefits from the breakup of AT&T, they were mistaken. A study of the breakup's aftermath revealsthat the overall financial performance of the post-divestiture period is not significantly better than that of the pre-breakup AT&T.Links: Linking ServiceFull text: Headnote Operating since 1900 as a regulated monopoly, American Telephone &Telegraph (AT&T) has providedHeadnote local and long distance telephone service for practically the entire United States. The monopoly was broken onJanuary 1,1984, when AT&T divested itself of its local telephone companies to enter the emerging informationservices market. The divestiture, known in the industry as the Modified Final Judgment, resulted in the formationof seven regional Bell operating companies. These "Baby Bells" were authorized to provide local telephoneservice. These authors examined the growth of telecommunications during the past decade from threeperspectives: technology, regulation, and comparative financial performance. They found that the industry hasadapted itself to a leaner, more consumeroriented corporate structure; regulators have not kept pace withtechnological advancements, which has shifted some real competition; and the overall financial performance ofthe postdivestiture period is not significantly better than that of the pre-break-up AT&T.American Telephone &Telegraph (AT&T) was formed as a private concern in 1900. As a provider of universaltelephone service to almost the entire nation ever since, it has become an integral part of the American way oflife. Originally regulated by the Interstate Commerce Commission (ICC), AT&T has been regulated by theFederal Communications Commission FCC) since that agency's 1934 inception as regulator of thetelecommunications industry. In fact, until 1984, and with the exception of GTE, the FCC primarily regulatedonly AT&T, because all other telephone companies were effectively too small to make any impact in theindustry. In stark contrast to the prevailing regulatory approach followed in almost every other country in theworld, AT&T operated as a government-regulated, private company. In a majority of countries, thetelecommunications industry is treated as a government monopoly.Before its divestiture, AT&T was a leader in introducing innovations such as "Touch-Tone dialing" and the "800-number service." However, the lack of competition in the industry did not bode well for the customers of thetelecommunications giant. New product and service research was slow, and the time required to bring newproducts and services to market was extremely lengthy.Independent of the telecommunications industry, another major development was taking place in the early1980s-the introduction of personal computers (PCs). In 1984, IBM entered the personal computer market and,in a short time, made the term PC a common acronym. By 1984, there were nearly 16 million PCs in operation.AT&T realized the potential of personal computers and envisioned using them to expand service offerings toinclude information services.Over time, AT&T lost several court cases as it fought to maintain its monopoly. Perhaps the best known is the1969 case initiated by MCI, the nation's second-largest long distance telephone company. A court decreeissued in 1956, however, prohibited AT&T from offering information services.l Moreover, long-term antitrustlitigation between AT&T and the Department of Justice (DOJ) continued to be a costly problem for the15 July 2015 Page 1 of 11 ProQuestmonopoly. As a result of the DOJ suit, AT&T became convinced that the regulatory climate was not conduciveto its success in the information market. The suit was ultimately settled in 1982. As part of the final agreement,known as the Modified Final Judgment (MFJ), AT&T agreed to divest itself of all local telephone serviceeffective January 1, 1984. In return, the 1956 decree was modified to permit AT&T to enter the informationservices market. In addition, local telephone companies were prohibited from entering the information servicesmarket.Government policy aimed at upgrading competition in the market for long-distance telephone service promptedthe breakup of AT&T in 1984. The substance of this policy was that an increase in the number of competitorswould reduce long-distance prices-a probable result to which all good economists could attest. The question, ofcourse, that remained was whether those economists' assumptions would be correct. Another concern waswhether other issues might overshadow the ability or inability of competition to reduce longdistance prices.Effective with AT&T's divestiture on January 1, 1984, seven new firms, known as the Regional Bell OperatingCompanies (RBOCs), were established: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis,Southwestern Bell, and US West. Table One designates the service areas these RBOCs cover. These RBOCsdeveloped and now support Bell Communications Research, a common research and development entity morecommonly known as Bellcore. By the terms of the DOJ agreement, AT&T was allowed to keep its manufacturingarm, Western Electric Co., the Bell Laboratories, and its long distance telephone service. Table Two details thefinancial status and the number of employees on January 1, 1984, for AT&T and the seven RBOCs.From the RBOCs' perspective, the key components of the 1982 MFJ are:no competition in their respective local service regionprohibited from providing long distance serviceprohibited from manufacturing and selling telephone equipmentprohibited from conducting individual research and development within the companyauthorized to provide connectivity to the long distance carriers to access local customersIndependent of the divestiture proceedings, another major development occurred in October 1983-theinauguration of cellular telephone service in Chicago. The FCC approved two cellular service providers, one ofwhich was to be the RBOC in each region. Beyond this approval, the FCC did not regulate the cellular industryin any way.This article examines the impact of AT&T's 1984 divestiture from the perspective of growth. We consider eachof the companies involved and both the benefits provided and costs charged to consumers or investors. Wealso focus not only on regulatory changes over the past decade and their resulting contributions to the shapingof today's telecommunications industry, but also the advances in technology and financial performance.Technology-Driven GrowthThe competitive environment brought on by the AT&T divestiture can be directly identified as the impetus for theresearch and design of many new products and services. The 1984 divestiture has fostered an era ofcompetition.Even though there are only four principal long distance carriers-AT&T, MCI, Sprint, and Worldcom-consumerscurrently can choose from nearly 25 long distance service providers. These 25 providers exist in addition to theRBOCs that have been permitted to provide long distance service as part of the Telecommunications Act of1996. To maintain their competitive position, all long distance carriers have installed fiber optic cables whichprovide high bandwidth. The high rate of technological growth in service differs significantly from that of theRBOCs. Because of competition, which the RBOCs do not have, long distance firms have, in essence, left "thelast mile" or local operations as "a dirt road on the nation's information highways."2 This situation will notcontinue for long.15 July 2015 Page 2 of 11 ProQuestOnce all of the legal ramifications of the Telecommunications Act of 1996 are sorted out, many long distancecarriers such as AT&T might jump back into the local service market because it is a $70-billion industry.Several utility and telephone companies now install high bandwidth fiber optic lines. In certain areas, electricutilities have threaded these fiber optic cables through old pipelines to monitor energy conservation efforts.Similar to telecommunications lines, these electric power lines have excess rentable bandwidth.One new service that utilizes the new high bandwidth is the Integrated Services Digital Network (ISDN) whichintegrates voice, data, and video communication. The ISDN can transmit information over two channels at64,000 bps (bits/second) and send the control signals independently at 16,000 bps. This ability to send thecontrol signals separately offers numerous possibilities. For example, individuals can receive information aboutthe originator of an incoming call before they answer the phone. The service can be enhanced to provide thename and phone number of the caller.However, in a survey by Pacific Telesis, many customers pointed out that they often do not remember theirfriends' phone numbers. Therefore, disclosing the phone number of the incoming call is of little value to them.One reason for this problem, of course, is that many telephones already offer memory call features.Consequently, many people may not even remember the telephone number of their closest friends becausethey have never had to learn them.Why, we might ask, were telephones with memory call and other special features developed? The answer issimple. The competition to supply telephone equipment forced vendors to create features designed to make lifeeasier. Had it been left to AT&T before the divestiture, the firm's ingrained methodical process likely would haveinhibited a quick introduction of new telephone features. In fact, it took AT&T more than three years to cultivatea new technology from concept to delivery. Today, the innovation life-cycle is 12 to 18 months. In the daysbefore the divestiture, the mindset of telecommunications firms was simply to inform customers about newtechnology. Today, competition dictates that the firms design products when a customer need is identified.One of the most controversial new services offered is Caller ID. Many consider the Caller ID service to be aninvasion of privacy. Once the caller's telephone number is revealed on the recipient's instrument, nothing canprevent the continued use of that number. One creative solution to this dilemma might be to disclose only callernames. Another feature developed after the divestiture-voice mailis popular today because of its variety ofoptions for callers. Voice mail generally is provided as a third party offering which means that it was notdeveloped by the telephone companies.Another popular servicevideoconferencing-is made possible today by the availability of high-bandwidth lines.15 July 2015 Page 3 of 11 ProQuestUsually, one can transmit television-quality pictures at only 1.5 mbps (megabits per second). However,advancements in compression technology have made it possible to transmit good quality pictures at 384 kbps, alevel easily supported by the current infrastructure. A T1 line, for example, is a combination of 24 channels of 64kbps, plus a control channel of 8 kbps, which gives it a total capacity of 1.544 mbps. The growth rate of T1 linesalone between 1990 and 1994 is about 30 percent. Today, Tl lines carry not only voice and video signals, butalso data traffic. At the same time, newer technologies such as ADSL (Asymmetrical Digital Subfiber Line) havemade it possible to provide higher speeds on existing phone systems. It is estimated that between 1991 and1995, the growth rate of data traffic culminated at about 32 percent, whereas the rate for video traffic should beabout 52 percent for the period. Because the demand for large data transfer is increasing rapidly, the firms nowhave started to install T3 lines which can transmit at 45 mbps. It is estimated that by the year 2003, the growthrate of T3 lines will exceed that of the T1 lines between 1984 and 1994.The decade that followed the divestiture produced tremendous growth in the number of new telephone lines. In1983, telephone service was available to 91.4% of American homes. During the last 10 years, the number ofhouseholds with phones increased by 11.5 million. Now, 94.2 percent of homes have telephone service. ReedHund, the chairman of the FCC, has stated a goal of providing telephone service to every household in thecountry. This ambitious goal will be rather difficult to achieve, given the current regulatory structure. In addition,the goal will be tough to reach because the cost of laying telephone lines to remote areas remains high.However, cellular service offers one possible solution which might make 100 percent household coverage fairlyaffordable to achieve.Cellular telephone service was inaugurated in Chicago on October 15, 1983, exactly 78 days before thedivestiture. In a way, the decade of the divestiture closely matches the decade of growth in the cellular industry.In 1984, there were fewer than 1 million cellular subscribers. Today, there are 13 million subscribers, and anaverage of 9,500 subscribers are added daily. The FCC permitted the licensing of two cellular companies ineach of the seven regions of the RBOCs. In each region, one license was given to the RBOC that served theregion, and the other was open to competitive bid. In all, cellular companies have invested $12.7 billion tomodernize the system. Recent auctioning of the newer Spectra has facilitated the growth of the cellular industryimmensely.In a recent study, Donaldson, Lufkin &Jenrette projected that, by the year 2000, there will be 16 million cellularphones that will reach 95 percent of the U.S. population. Over the last decade, the FCC did not stringentlyregulate cellular companies. Although it did allocate the cellular broadcast frequency, it did not regulate otheraspects including industry pricing structures, which have been dictated entirely by market forces. A financiallyrewarding industry, the cellular market is growing annually at a rate of 30 percent. For example, in 1993, PacificTelesis generated $100 million from cellular telephone interconnections.Cellular callers, however, have started to demand land-line quality and the ability to communicate whiletraveling through tunnels, parking garages or airports. In other words, they request uninterrupted, reliableservice. In general, customer tolerance for problems is shrinking. Regarding the telephone as a principal meansof communication, customers have spawned a growth in cordless and cellular phones that, over the last tenyears, has been dramatic. These long-popular devices now are joined by personal communication servers(PCS). PCSs give customers the convenience of a single, portable unit that provides both computing andcommunication services. This innovative design consumes less energy than a cellular phone. However, thistechnology has not yet caught the public's fancy.Another new technology that is destined to play a major role is the asynchronous transfer mode (ATM). TheATM technology transmits at very high speeds over long distances and can carry video, data, and audio in anintegrated manner. This technology provides opportunities for distributing movies to the home on demand andhas already brought about several new alliances in the industry. The technology is much more widely acceptednow than technology such as ISDN (Integrated Services Digital Network). Existing hardware capabilities are not15 July 2015 Page 4 of 11 ProQuestquite adequate for the speed and band width that ATM can offer. Instead, the industry is adapting ATM toslower speeds.In collaboration with Time Warner company, US West is already conducting an ATM field trial in the Orlando,Florida area. The success of this new technology could radically revolutionize both the television andnewspaper industries. As a result, consumers will have numerous entertainment options available from a widevariety of providers.The ATM technology will also greatly influence the health care industry. Its highly-reliable, high-speed datatransfer capability can bring the services of medical specialists to remote sites. A study conducted in 1992 bythe U.S. Department of Transportation shows that nearly 2 million full-time workers telecommute to work. Thesame study projects that by the year 2003, the number of telecommuters may rise to 15 million.3 In part, thisgrowth will be attributed to the ATM technology.Regulatory ControlRegulation and technology in the telecommunications industry have not meshed well. Similar to most regulatedindustries, there are several reasons that the pace of technological innovation is far greater than the pace ofregulatory reform. First, there are many more technological innovators than regulators. In addition, theregulators tend to be more cautious than technologists in their approach to innovation.There are three kinds of regulations: standardization, antitrust, and economic. In telecommunications regulation,standardization regulations attempt to deal with setting common standards for communications hardware andthe types of services offered. Antitrust regulations are enacted to correct market distortions created by certaincompanies with financial clout and to outlaw agreements made by firms to distort competition. The focus ofeconomic regulations is the allocation of markets or resources.There are two types of telecommunications regulators: the federal government's FCC and the stategovernments' public service commissions (PSCs. The FCC and the PSCs are guided by congressionallegislation enforced by the courts.The goal of the FCC and the PSCs is to provide low cost services and social pricing, which may not reflect thetrue cost of services. In a recent study,4 the United States Telecommunications Association found that as partof social pricing, the subsidy for providing basic telephone service to local users amounts to $20 billion annually.This amount is nearly twice the total profit for the entire telecommunications industry.As noted previously, all of the RBOCs were given monopolistic rights in their respective service regions. At thesame time, they were required to provide universal service in that region. However, in the long run, the FCC andthe PSCs may consider allowing competition at the local level. Such a policy should be disclosed and clarifiedwell in advance, and a transitionary period should be provided, during which the monopolistic form of servicecould be gradually phased out. Unfortunately, no such policy has been announced. Instead, competitive accessproviders (CAPs) have been allowed to operate in local service areas.CAPs choose to operate in the high volume business market by connecting customers directly to long distancecarriers and bypassing local exchange carriers (LECs), as shown in Figure One. In 1984, there were no CAPs.However, today there are nearly 30; the largest ones are Denver-based Teleport and Nebraska-based MFS.MFS has announced a merger with Worldcom, which, if approved, will provide the first long distance carrier withthe ability to provide local service as well. At the same time, AT&T has filed applications in all 50 states toprovide local service.CAPs are neither expected to provide universal service nor subject to pricing restrictions for their services.Consequently, they are able to undercut the LECs in price and wean away large business customers,government agencies, universities, and hospitals. The LECs currently charge more than CAPs for both businessservice and toll calls in their regions. This is necessary for them to be able to subsidize basic services.CAPs often take away the cream of the LEC's business which places excessive pressure on the LECs to securesubsidy funds to cover the cost of local service. In this context, it might be more prudent for regulators to apply15 July 2015 Page 5 of 11 ProQuestthe "universal service" concept equally to all providers.A recent decision by Judge Harold Greene, overseer of MFJ implementation, gave permission to the CAPs tolocate their switches adjacent to the LECs. Even though the CAPs now account for a very small amount of thetotal business, installing adjacent switches in only 14 percent of the locations gives them access to 80 percentof all traffic. If the CAPs capitalize on that concept, the LECs will be hard pressed to provide universal service.Originally prohibiting long distance carriers from offering intraLATA (local access transport area) service, theMFJ-defined LATAs are based on a "community of interest" concept, rather than area codes or stateboundaries. A state may have more than one LATA; currently, there are more than 300 LATAs in the continentalUnited States.Passage of the Telecommunications Act of 1996 has lifted most of the restrictions of the 1984 Modified FinalJudgment Agreement. Both the FCC and PSCs are working on implementing the provisions of the new actwhich was intended to usher in competition in the $70 billion local telephone service market. A recent courtruling in favor of the RBOCs, however, will delay competition in the local telephone service market.When the MFJ became effective in 1984, the United States Congress also enacted the Cable Act whichprohibits the RBOCs from offering video services in their own regions. This means that an RBOC such asBellSouth cannot collaborate with a cable company in Atlanta or Miami but could, in fact, offer enhanced videoservices in New York, Chicago, or Los Angeles by collaborating with the cable companies in those areas.In a recent study, Wharton Econometric Forecasting Associates (WEFA) predicts that the removal of all MFJand Cable Act restrictions on the RBOCs can provide significant economic benefits. In particular, the WEFAestimates that the removal of the constraints would:add 3.6 million new jobsincrease consumer spending by an additional $137 billionimprove the balance of trade by an additional $33 billionreduce unemployment by an additional 0.5 percentadd more than $247 billion to the total GDPreduce the federal budget deficit by an additional $150 billion.Given regulatory recognition of the current pace of technological innovation, the removal of artificial restrictionson the telecommunications industry would allow U.S. technology to play a significantly greater role in the globalcommunications arena. Europe is already on the path to providing a single market with a common standard forall communications. If the regulations in the U.S. hold back innovations, the country is likely to lose itspreeminence in the telecommunications market.Financial AnalysisThe January 8, 1982 agreement between AT&T and the DOJ resulted in an AT&T spinoff of 22 operatingcompanies. The division of the telecommunications giant created seven regional operating firms, and AT&Tretained Western Electric, (manufacturing), Bell Laboratories (research), the longlines, and customer equipmentdepartments. Theoretically, the purpose of the breakup was to eliminate AT&T's monopolistic control of theindustry. The expected result of introducing competition into the AT&T markets was a reduction of customercosts because of more effective and efficient allocation of resources.Two divergent interpretations of what has actually occurred have been offered. AT&T asserts that the result ofcompetition has been exactly the one desired and expected-price reduction. The RBOCs, however, suggest thatquite the opposite-competitor conspiracy-has occurred. Conflicting results also have been provided by variousempirical studies. Researchers William and Lester Taylor concluded that the "reduction in carrier accesscharges paid by long distance companies to the local telephone companies" has provided the explanation for"overall reduction in interstate long-distance prices and expansion of interstate demand. "5Another analyst, however, suggests that the downward trend of prices has been a direct result of the divestitureand competition.6 The latter's findings confirm those of Taylor and Taylor that savings "do not appear to have15 July 2015 Page 6 of 11 ProQuestbeen passed on to consumers" and, he suggests, "neither competition nor divestiture has had any real effect onlong-distance rates."7Inevitably, because none of the resulting eight companies had an individual corporate history, the breakupcaused major upheaval in the financial markets because of the lack of information or track records for any ofthese surviving organizations.Now, more than a dozen years after the spin off, which was effective January 1, 1984, a number of reports havebeen published regarding whether the objectives of the divestiture have been effectively achieved. Ourinvestigation examines the performance of the pre- and post-divestiture firms from several perspectivesincluding operating efficiency, liquidity, leverage, and profitability.An examination of the financial statements of AT&T, both pre- and post-divestiture, and the seven RBOCsprovides a number of interesting findings. The analysis compares the ten year pre-divestiture period (1974-1983) with the ten year post-divestiture period of 1984-1993.The analysis suggests that, although AT&T does in fact face strong competition from several strong players inthe long-distance market, and customer prices have been reduced, investors and creditors do not appear tohave received benefits worthy of the significant costs associated with the divestiture. With regard to long-distance rates, in fact, as shown in another study, they have been exponentially decreasing not just for the pastten years but for the past 80 years. This finding suggests that the divestiture itself is notnor is competitionthedriving force in rate decreases. In addition, despite the competitive environment and numerous technologicaladvances, prices in the post- breakup period have not been reduced at a rate greater than the annual 4 percentrate realized under the pre-split AT&T conglomerate.8What changes actually have taken place? Consider first that although revenues for the post-split groupincreased 35.6 percent between 1983 and 1994, the average annual rate of growth in those revenues was only3.5 percent. By contrast, in the last ten years before the split, AT&T revenues increased 167 percent, and therewas an 11.5 percent annual growth rate. Therefore, despite all of the rapid and significant technologicaladvances in both products and services since AT&T was split on January 1, 1984, these results do not suggestthat it was beneficial to break their monopolistic position in the telecommunications industry.More important, it appears that the expectation of improved asset allocation also has not been realized.Theoretically, significant amelioration in resource usage should have resulted from the increased competitioncaused by the DOJ agreement. A comparative assessment of the resulting performance data, however,suggests that this actually did not occur.Specifically, asset turnover and net margin (return on sales) for the postsplit firms averaged .56 times and 10.0percent respectively; meanwhile, the pre-split AT&T averaged .41 times and 11.56 percent. In essence, theturnover results indicate that the pre-breakup AT&T turned dollars invested in assets into only $.41 of sales, butthe postbreakup group turned them into an average $.56 of sales. However, the lower pre-breakup turnover waseffectively offset by a higher sales margin at the bottom line. These results-especially the margin increasedifferential-appear even more troublesome when the significant increases in sales and advertising expenses, inexcess of $2 billion, over the post-breakup period are considered. These return-on-sales results provide furtherverification of the breakup's failure to enhance efficiency or pass along savings. Further evidence that leads tosimilar conclusions is illustrated by looking at the minor difference in the firms' operating ratios of 86 percentand 82 percent for the postand pre-split firms, respectively.The interaction of turnover and margin combined to provide an average return on investment of 4.6 percentduring the 1974-83 timeframe and 4.9 percent during the post-split era of 1984-93. Such differences appearminor, given the costs associated with the divestiture and the fact that cost savings do not appear to have beenpassed on to consumers in items such as lower long-distance rates.It is important to note that the return on investment was calculated on an after-tax basis. This implies that itincludes the effect of both tax law and policy, as well as the amount of financial leverage undertaken by the15 July 2015 Page 7 of 11 ProQuestfirms. As a result, the returns presented are affected, in the case of the pre-breakup firms, by the higher level ofaverage debt exhibited. Although such leverage normally provides an enhancement of return, the high cost offinancial leverage during the late 1970s and early 1980s provided a reduction in the already high net marginwhich impeded the normal magnification effect of leverage.As previously noted, the observed financial leverage positions of the preand post-divestiture firms do appear todiffer somewhat. Pre-divestiture AT&T averaged 46 percent long-term debt as a percentage of capital; however,the post-divestiture group averaged longterm debt of only 40 percent. As a result, and because of the highinterest costs associated with debt during the pre-split period, the pre-breakup firm also, on average, was ableto cover fixed charges only 2.57 times. Because of lower debt levels, and the reduced cost of debt after thesplit, the post-breakup group was able to cover fixed charges an average 4.18 times.To better assess the true financial risk over the two periods, it is important to also consider the issue of liquidityas evidenced by measures such as the current ratio and cash flow per share. In the 1974-83 period, AT&Tappears to have taken on more financial risk, averaging a current ratio of only .74. This suggests that liquidatingall current assets at book value would provide coverage of only 74 percent of current debt obligations. The less-leveraged, post-split group showed a relatively higher level of liquidity at .87. However, cash flow per share wasmarkedly better for the pre-split firm. Over the period of 1974-83, AT&T was able to provide an average $15.40of cash flow per share. The post-breakup group provided an average of only $6.70 cash-flow per share.Although the original AT&T did have a higher level of debt and debt cost and further exhibited a lower currentratio, in fact, it had a significantly higher ability to turn profits into cash flow which effectively managed its higherlevel of debt.Of course, the bottom line may be the real key to a verification of increased efficiency and profitability. For theeight divested firms, net income after tax, on average, grew 20.3 percent over the 1984-93 period. However,because of significant losses in four of the ten years, their average rate of growth was negative at -9.5 percentannually. For the pre-breakup AT&T conglomerate, after tax income grew 81.3 percent over the ten-year period1974-83. No losses were realized during the period, and the annual rate of growth in aftertax income was 6.8percent.On a per-share basis, annual earnings for the original AT&T averaged $6.42. By contrast, the post-breakupgroup averaged only $ 1.92 in earnings per share per year. Although we cannot say with certainty that similarresults would not have been realized in the 1984-93 period had the breakup not occurred, such results do bringthe wisdom of the DOJ divestiture agreement into question. As a result of the higher level of financial leverage,and the higher growth rates in sales and net income, the earnings yield of the pre-divestiture firm was higher(12.5 percent) than that of the post-divestiture group (8.7 percent). This finding agrees with the perceived higherlevels of risk generally associated with additional increments of debt and growth.Perhaps the financial characteristic most important to utility stock investors is the dividend yield. The pre-splitAT&T averaged 8.2 percent yield with a range of 6.7 percent to 9.9 percent. The post-split companies, with alower yield range of 4.2 percent to 6.29 percent, averaged a yield of only 5.8 percent.The information conveyed by these findings with regard to earnings, cashflow, and dividend yield do not appearto be imbedded in the stock prices of these firms over the periods studied. Despite its relatively betterperformance over the pre-divestiture period, the pre-agreement AT&T stock price appreciated only 37 percentand earned only a 3.73 percent annual rate of return. By contrast, the post-divestiture group posted a priceappreciation of 205 percent and provided an average capital gains yield of 8.3 percent. As a result, total return,defined as the capital gains yield plus the dividend yield, to the pre-split AT&T investors averaged 11.9 percent,and the post-split total return average was 14.1 percent with the majority of return coming from price changerather than dividend yield. Although the dividend yields and total returns of the post-split group are still at levelsindicative of dividend stocks, it does appear that the firms created by the DOJ agreement are more like growth-or total return stocks-than the AT&T stock of the 1974-83 period.15 July 2015 Page 8 of 11 ProQuestThe stock volatility measures of the respective stocks corroborate our conclusion that the stocks of thepostbreakup group trade more like growth stocks than income stocks. The stock volatility measure is defined asVolatility Measure = (High Price - Low Price)/ [Low Price + High Price)/2]. Over the ten-year pre-split period,AT&T exhibited an average volatility measure of only .21, but the post-split firms averaged a measure of .31.This indicates that the stock price of the pre-divestiture AT&T, on average, was less volatile than were the stockprices of the post-divestiture group. This finding is further substantiated by the fact that no single post-divestiture firm exhibited a volatility measure lower than .27. These results indicate that, along with the higherprice appreciation exhibited by the post-divestiture stocks, there was a significantly higher level of stock pricevolatility or market risk.Mixed Divestiture ResultsTelecommunications is a principal driver of economic growth. We can no longer treat telecommunications as theutility it was a decade ago. It is now a more strategic industry with both a big stake in-and a significant effect on-the country's economic growth.Divestiture has brought competition to the industry. Customers have come to expect consistent anduninterrupted service between one type of telecommunications service and another, with simultaneousmaintenance of flexibility of location. Currently, we all endure the plethora of numbers that one has to rememberfor business voice, data, facsimile, cellular, and residential telephones. The day is fast approaching when wewill need only a single number-one that will accompany a user indefinitely. The technology already exists toprovide this service, and the infrastructure is now being strengthened to support its eventual volume. Regulatorsshould be ready to meet these technological advances. A major step in this direction was achieved by thepassage of the Telecommunications Act of 1996.To summarize the findings of our financial analysis, pre-breakup AT&T realized higher rates of growth in salesand higher net income after tax than the post-breakup AT&T and the RBOCs. The pre-divestiture firm alsoexhibited a higher level of financial leverage than the post-divestiture group.During the 1974-83 timeframe, AT&T provided its stockholders both a higher reported earnings-per-share andhigher cash flow-per-share than the post-divestiture era. Not surprising, both the earnings and dividend yieldsprovided by the pre-divestiture monopoly also exceeded those of the postdivestiture firms.Despite the high cost of debt during the 1974-83 period, the net margin, operating ratio, and rate of growth inincome were all superior during the pre-breakup period, as were earnings per share, cash flow per share,dividend and earnings yields, and growth in revenues. Although the stocks of the postdivestiture group provideda higher level of appreciation, despite lower margins and rates of growth in revenue and income than the pre-divestiture firm, they also provided a relatively higher level of market volatility or risk.Although the findings are somewhat mixed, the small differences between the areas in which the post-split firmsoutperform the pre-split AT&T, and the large differences in measures in which the original AT&T outperformedthe divested firms lead us to believe that from a financial perspective, pre-divestiture AT&T outperformed thepost-divestiture group. In addition, we observe that long-distance rates had been exponentially decreasing for80 years, not just the last ten, which suggests that technological change-not competition or divestiture-hasprovided rate reductions. Therefore, the financial objectives of the DOJ agreement have not been realized.References 1 United States v. Western Electric Co., 1956, Trade Case, 68,246 (D.N.J.). 2 Allen, Robert E., "A View ofDivestiture, Ten Years Later," IEEE Communications Magazine, 37(12), December 1993, 18-19. 3 Council onCompetitiveness, "Vision for a 21st Century Information Infrastructure," May 1993. 4 Sodolski, John., "Publicpolicy must maintain fair competition as its goal,"IEEE Communications Magazine, 37(12), December 1993, 65-67. 5 Taylor, William E., and Lester D. Taylor, "Postdivestiture Long-Distance Competition in the United States,"American Economic Review, 82(2), May 1993, 185-190.6 Hall, Robert E., "Long Distance: Public Benefits from Increased Competition," Applied Economic Partners,15 July 2015 Page 9 of 11 ProQuestMenlo Park, California, October 1993. 7 Noll, Michael A., "The Split-Up Worked. No, It Didn't," The New YorkTimes, January 23, 1994, 13.8 Noll, Michael A., "Comment: A Study of LongDistance Rates-Divestiture Revisited, TelecommunicationsPolicy, 18(5), 1994, 355-362.AuthorAffiliation JAY T. BRANDI, Ph.D., is an associate professor of finance and executive director of the School of Business,College of Business and Public Administration, at the University of Louisville, in Louisville, KY. He teachesAuthorAffiliation corporate finance, investments, portfolio management, and special finance courses at both graduate andundergraduate levels. He is also a financial consultant and expert witness in litigation. Previously, he wasAuthorAffiliation the assistant director of the Florida Division of Securities and a registered lobbyistAuthorAffiliation S. SRINIVASAN, Ph.D., is a professor of computer information systems in the College of Business and PublicAdministration at theAuthorAffiliation University of Louisville, in Louisville, KY His research interests lie in the areas of broadband communicationsand client/server systems. He has written articles for ACM and IEEE journals, Journal of Information SystemsAuthorAffiliation Management, National Public Accountant, and the CPA Journal. He is a category editor for ACM ComputingReviews.Subject: Studies; Divestiture; Telephone companies; Impact analysis; Location: USCompany / organization: Name: AT & T Corp; Ticker: T; DUNS: 00-698-0080; Classification: 9190: US;2320: Organizational structure;8330: Broadcasting & communications industry;9130: Experimental/theoretical treatmentPublication title: Business ForumVolume: 22Issue: 2/3Pages: 50-57Number of pages: 8Publication year: 1997Publication date: Spring 1997Publisher: California State University, Los Angeles, School of Business and EconomicsPlace of publication: Los AngelesCountry of publication: United StatesPublication subject: Business And EconomicsISSN: 07332408Source type: Scholarly Journals15 July 2015 Page 10 of 11 ProQuestLanguage of publication: EnglishDocument type: PERIODICALAccession number: 01641892ProQuest document ID: 210201244Document URL: http://search.proquest.com/docview/210201244?accountid=35812Copyright: Copyright California State University, Los Angeles, School of Business and Economics Spring 1997Last updated: 2014-05-19Database: ProQuest Central_______________________________________________________________ Contact ProQuest Copyright 2015 ProQuest LLC. All rights reserved. - Terms and Conditions15 July 2015 Page 11 of 11 ProQuest