[BETA] Fortnightly

AT&T and U S WEST scored points with investors, but PacTel's AirTouch deal failed to move the market.ell before the Telecommunications Act of 1996 was signed, it had become abundantly clear to telephone companies that they would need to change their organizational or corporate structures to keep pace with the changing business and regulatory climate.

The question, however, was how to make that structural change pay off on Wall Street (em how to use the reorganization to attract attention in the market and thus secure a financial reward for both stockholders and customers.

One option (em a structural separation of regulated from unregulated business segments (em would appear logical and might even boost efficiency by allowing managers to focus separately on each segment of the business. For example, a separation into business segments would arguably concentrate asset groups with similar earnings, dividend, and risk characteristics (em more so than if the parent firm continued to hold both regulated and unregulated segments. Moreover, the separation of assets into concentrated groups may help solve problems related to dividend policy. (Payout ratios appropriate for a regulated, slow-growth monopoly make less sense for a competitive firm, which must retain a higher proportion of its earnings.)

If a structural separation is deemed appropriate, then the choices come down to 1) a spinoff of the unregulated from the regulated business, or 2) the issuance of targeted stock, which allows trading of isolated equity for the particular, targeted business segments, but maintains a unified management structure.

Here, we analyze the impacts of the separations that have occurred recently (spinoffs and issues of targeted stock) to determine their impact upon shareholders and

customers. To make the analysis more useful, we have kept the comparison to companies within a similar risk group by limiting the analysis to structural changes in AT&T and the regional Bell operating companies (RBOCs). Specifically, we compare the impacts upon shareholders and ratepayers of three restructuring announcements:

s Pacific Telesis (em the spinoff of AirTouch, announced on December 14, 1992

s AT&T (em the spinoff of business segments into "new AT&T," NCR, and Lucent Technologies, announced September 21, 1995

s # U S WEST (em the issuance of targeted stock in 1995 to form the Media and the Communication groups, announced April 10, 1995.

We will compare these two different methods of reorganization to determine if they have brought about similar or dissimilar impacts on shareholders and, by extension, the cost of equity capital.

This exercise may prove useful to electric utilities, as they consider whether to divest themselves of generating plants or isolate competitive assets from transmission and distribution. It may also help utilities decide whether and how to revamp their dividend payment policies.

The Benefits, in Theory

Richard D. McCormick, chief executive officer of U S WEST, stated in the 1995 annual report: "Our goal in this targeted stock plan was to unlock the value represented by two separate businesses, which we felt was not fully reflected in the price of the old U S WEST shares."

In financial markets the reaction was mixed. The