AT&T Activist Showdown Raises Question: How Much Fat Can Be Cut?
AT&T Activist Showdown Raises Question: How Much Fat Can Be Cut?
(Bloomberg) -- AT&T Inc.’s showdown with activist investor Elliott Management Corp. has put Ma Bell’s operations under a microscope and raised a key question: How bloated is the telecom-and-media giant?
Elliott -- run by the combative billionaire Paul Singer -- thinks the company can cut at least $5 billion annually, and possibly more than $10 billion. The idea is to reduce costs for functions such as finance, human resources and marketing, and close some stores and facilities.
AT&T has already been slashing costs for years and downplays the idea of pursuing Elliott’s more draconian plans. But the fear of deeper cuts was enough to jar AT&T’s union, the Communications Workers of America, which represents more than 100,000 employees at the company. It issued a statement this week condemning Elliott’s plan as “outdated.”
Some analysts think AT&T is already slimming down about as quickly as possible. Most of the obvious fat is currently being trimmed, said Michael McCormack, a telecom analyst at Guggenheim Securities.
“AT&T management is already pretty far down the path,” he said.
But when you compare the Dallas-based company with its biggest rival, Verizon Communications Inc., it doesn’t look as lean, said Michael Mahoney, senior managing director at Falcon Point Capital, which owns shares in AT&T.
Not Crazy?
AT&T trails Verizon in financial performance. To catch up in gross margin, for instance, the company would need to cut more than $6 billion in costs, Mahoney said.
“Elliott’s number doesn’t seem crazy to me,” Mahoney said.
Of course, AT&T has become a very different company than Verizon since acquiring Time Warner Inc. for $85 billion last year. It’s now a media conglomerate -- with a movie studio, cable channels and a budding streaming business. Along the way, it became one of the most indebted companies in the U.S.
Chief Executive Officer Randall Stephenson oversaw the strategy, and entrusted key lieutenant John Stankey with running Time Warner, now called WarnerMedia. Stankey was given the additional roles of president and chief operating officer this month, a sign he’s being groomed to take the reins. Stephenson could step down as soon as next year, the Wall Street Journal reported.
Verizon has pursued more of a piecemeal media strategy. The company attempted to turn a collection of aging dot-com brands, including Yahoo and AOL, into an online-ad empire. But even that less-costly effort has now been scaled back, letting Verizon focus on what it does best: phone service.
Seeking Rationale
Elliott has criticized AT&T’s takeover of Time Warner, saying the company “has yet to articulate a clear strategic rationale” behind the deal. But with the purchase more than a year old -- and AT&T developing new entertainment services to market to its mobile and pay-TV customers -- the acquisition would be hard to roll back.
Still, AT&T could do other things to get its house in order.
Revenue per employee at AT&T is about 35% below that at Verizon, Mahoney said. That doesn’t mean that the company’s workforce, which stood at about 268,000 at the end of last year, needs to be chopped by that amount.
But a 10% reduction, plus a new incentive program to make remaining staffers even 10% more productive, could “close half of that gap” in two years, he said. Some of the cuts also could come from reducing layers of management, he said.
“I don’t think it’s a culture-killing goal,” Mahoney said.
Closing Stores
AT&T’s stores are another source of inefficiency, Mahoney said. They haven’t done a great job marketing the company’s service. And unless that changes, AT&T should close a third of the locations to reduce costs -- and remodel another third, he said.
Mahoney also agrees with Elliott that AT&T’s procurement operation likely can be improved by negotiating lower prices on goods bought in bulk.
“AT&T has been known as a pretty generous, full-price payer,” he said.
Beyond steps that might be characterized as pruning, AT&T could improve its financial performance by tackling sacred cows: the money-losing landline business and the DirecTV satellite service. Both are in long-term decline, and the company should be taking at hard look at them.
If certain businesses can’t be sold, they may just have to be shuttered, Mahoney said.
“Even a marquee, huge established business like AT&T, if you don’t run it like that, and if you keep piling on debt, you can get in trouble,” he said.
Elliott declined a request for comment. An official with the Communications Workers of America said the union doesn’t yet have an estimate of the job losses that Elliott’s recommendations would entail, but it is taking a look.
The cost-cutting estimate assumes, of course, that AT&T management will listen to the activist’s suggestions. The company declined to comment beyond the statement it put out about the Elliott letter.
“Our management team and board of directors maintain a regular and open dialogue with shareholders and will review Elliott Management’s perspectives in the context of the company’s business strategy,” the company said earlier this week. “We look forward to engaging with Elliott. Indeed, many of the actions outlined are ones we are already executing today.”
Abrams Deal
Some observers see potential for AT&T to leverage its far-flung operations. The company could potentially use one of the business’s technology -- such as analytics capabilities -- across the rest of the company, said wireless consultant Chetan Sharma.
In any case, AT&T made it loud and clear this week that it’s not short-shrifting its media operations: The company announced a blockbuster deal with superstar producer-director J.J. Abrams. He’ll oversee movies and TV shows for Warner Bros., the new HBO Max service and other AT&T media properties.
“We are uniquely positioned to offer our creative partners a multitude of platforms to realize their artistic goals and ambitions,” Stankey said. The Abrams partnership “will now flourish for many years into the future across the entire WarnerMedia and AT&T family.”
--With assistance from Scott Deveau.
To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net
To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Rob Golum
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