Take Note from Bad Big Name Stock Deals

Joan E. Lappin, CFA

Physician's Money Digest, April15 2004, Volume 11, Issue 7

Physician-investors need to practicecaution when selectingtheir stocks. Nothing can bemore deceptive than whenhousehold name companies come outwith a hyped, irresistible initial publicoffering (IPO). A big name stock is fine,provided you're not overpaying. Takenotes from a recent stock inflation.

At the end of February, investmentbankers were busy auctioning off the carcassof AT&T Wireless (AWE). CingularWireless, a joint venture of SBC Communicationsand Bell South, was busyratcheting up its daily bid to make sureit trumped Vodafone to emerge as thewinner of these assets. Cingular endedup agreeing to overpay $41 billion, or$15 per share, to become the largest UScellular carrier.

NTT DoCoMo owned 17% ofAWE. Having overpaid a ridiculous$24.15 per share in November 2000,NTT decided not to throw more goodmoney after bad. The CEO of Nextel,another rumored bidder, was spottedover the weekend presiding at theDaytona 500, armed with a broadcastingheadset but no checkbook.

Whose Triple Win?

Upon the deal's close with Cingular,AWE Chairman and CEO John Zeglisdeclared, "Today's announcement is atriple win for AWE shareowners, customers,and employees."

Just exactly who does Zeglis thinkhe's kidding? Almost nobody made anymoney in this stock from the day it wasspun out of AT&T as a tracking stock.Try telling that to NTT DoCoMo,which lost a third of its $9.8-billioninvestment. Try putting that one overon the poor AWE employees, for whoma significant amount of stock was setaside on the IPO. This IPO occurred atthe height of the investment bubble. Itwas made public at $29.50 and tradedever so briefly to $36. By the end of itssecond week of trading, it was below itsoriginal worth and headed south for thenext 2 1/2 years.

One AT&T employee mortgaged hishome so that he could afford to pay foras much stock as they would let himhave on this deal. When Zeglis spoke ofa handsome return on investment, hecan only mean those who invested inlate 2003, when the first rumors startedswirling that a deal was imminent. Justdays before the deal was finalized, thestock was trading at only $11. AWEfooled NTT DoCoMo into overbiddingin 2000. Maybe they have pulled off thesame trick again on Cingular.

Right and Wrong Paths

Just like Comcast's acquisition lastyear of AT&T Broadband, the acquirerof these assets is likely to run them farbetter than the folks at AWE. The core ofthis operation was formerly McCawCellular, which AT&T acquired morethan a decade ago. The insurmountableproblem at AWE was to get business peoplewho grew up in a monopoly environmentto think like aggressive, competitiveentrepreneurs. They couldn't do it in thecable business, a quasi monopoly, andthey were even less capable of doing it inwireless with multiple competitors.

At the launch of AWE's IPO, the company'schurn (ie, the monthly number ofsubscribers lost by a provider eachmonth) was at 4%. If 4% of your customerschurn off your system everymonth, you're losing 48% or almost halfof your customers every year. In thefourth quarter of last year, AWE addedonly 128,000 net new subscribers.

How many AT&T folks will get tokeep their jobs? My bet is the lion's shareof them will be employed elsewhere ayear after this deal closes.

Meanwhile, Craig McCaw took themoney he made from selling his cellularbusiness to AT&T and invested it inNextel. Unlike the true cellular operators,Nextel didn't initially have a largeblock of contiguous frequency withwhich to build its business. By necessity,frequency-starved Nextel learned tooptimize whatever bandwidth it had andto maximize every revenue opportunity,acquiring frequency at low-ball prices.

AT&T had both bandwidth andmoney. It never had to be innovative orclever to survive. Currently, Nextel hasaccumulated over 13 million happy customers,paying the largest monthly feesin the industry. The churn is at an industry-leading 1.5%.

Future Projections

In mid-2002, WorldCom was goingbankrupt and telecom was a bad word.In the meantime, Nextel has boughtback debt, watched its credit ratingsrise, gone from a loss to earnings, andreally cleaned up its act. That combinationis why Nextel stock went from $3in June 2002 to $28 at 2003 year-end, again of more than 900%. In the sametime period, AWE went from $5.85 to$7.99, a gain of 37%.

As further consolidation occurs inthe cellular industry, I expect Nextel tomaintain restraint in what it will bid forothers and to continue to show its competitorshow to maximize revenues, profits,and customer satisfaction.

Joan E. Lappin is the chairman andchief investment officer of GramercyCapital Management Corp, aNYC-based registered investmentadvisor. For more informationabout a personally managed portfoliotailored to your investment goals, call Gramercyat 212-935-6909. Lappin appeared in the year-endissue of Business Week on "How to Invest in 2004."