SAN FRANCISCO (CNN/Money) -
Ma Bell is giving new meaning to going full speed in reverse.
Amid the daily dollop of criminality, venality and just plain stupidity in the business pages, AT&T (T: up $0.33 to $13.60, Research, Estimates) this week unveiled one of the silliest moves a supposedly blue-chip company could make.
Once it spins off its cable business to Comcast, which still requires regulatory approval, the once-proud telecommunications company plans a reverse 5-for-1 stock split. AT&T's share price will jump up by a factor of 5, and shareholders will have one-fifth the number of shares (see more on the split announcement).
It's been noted here that stock splits in general are meaningless because they don't change the value of the company. Well, reverse splits don't change the value either -- but they are rather meaningful indeed.
Reverse splits send a clear signal of real trouble ahead.
Think about it. After the cable spin-off, AT&T will be left with its telecom businesses, and the current thinking is that the stock will be around $4 or $5 a share. AT&T says a single-digit stock price doesn't appeal to certain institutional investors. But if the outlook was rosy, management wouldn't be focusing on staying in the single digits. It would be talking about plans to get to $10.
"If you had any belief your future was getting better, you wouldn't do this," says telecom guru Paul O'Neil, of Toronto's Knight Bain Seath & Holbrook, a friend of this column who also happens to nearly always be right. "This has got to be a signal that some bad (stuff) is going to come."
Of course, it doesn't have to be. But O'Neil is as down on telecom as he's been over the past two years. Other than CenturyTel (CTL: down $0.05 to $33.15, Research, Estimates), a Louisiana company that operates in a handful of monopoly markets, "I don't own one telecom stock right now," he says.
O'Neil notes that telecommunications services companies now comprise only about 4 percent of the S&P 500. But carriers like AT&T have declining businesses, heavy debt loads and excess capacity. "There's no reason to own these right now," says O'Neil.
And then there's the whole prestige issue. In the business world, AT&T is synonymous with two words: Monopoly and quality. It built the phone system. And built it well. But that's all in the past.
With its reverse split, AT&T enters the schlock zone, joining a scary list of those that went before -- and failed. A handful of companies that initiated reverse stock splits are Quokka Sports, PlanetRx, Webvan, Finet.com, PopMail.com and Clariti Telecommunications. The first three are gone as companies; the second three don't trade on major exchanges.
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RECENTLY BY ADAM LASHINSKY
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There's one last bit of ignominy facing AT&T. Reuters reported that records dating back to 1928 indicate there never has been a Dow component that has completed a reverse stock split. AT&T is famous in technological circles for its many firsts. It's awfully sad that this first might be its last.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.
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