Then last week, AT&T Wireless stock was actually issued at about the price projected in the fall. So what happened? On Thursday, AT&T Wireless’s first day of trading, AT&T stock fell 6 percent even though the Wireless stock rose about 8 percent. Repeat after me: “Buy on the rumor, sell on the news.”
Please understand that I’m not offering advice on whether AT&T Wireless, whose stock symbol is AWE, is an AWE-some, AWE-ful or AWE-shucks investment. But this AWE-inspiring $10.6 billion sale, the biggest initial public offering of stock ever seen on Wall Street, does tell us something about the Street–and about human folly.
Wall Street first. If you’ll suffer a soupcon of math, you’ll see that the valuations of AT&T Wireless and AT&T Classic stock seem out of whack with each other. Here’s why. At Friday’s 4 p.m. closing price, AT&T’s 3.1 billion common shares were valued at $145 billion. But one of AT&T’s assets is the 1.95 billion Wireless shares that it owns and plans to distribute or sell by year-end. The market was valuing those Wireless shares at $62 billion. Subtract that from the aforementioned $145 billion, and the market was valuing the rest of AT&T–whose assets include the nation’s biggest long-distance and cable-TV operations–at only $83 billion. Meanwhile the market values Wireless at $74 billion, if you include the shares owned by public investors.
Hello? Wireless is an interesting company–it has 12.5 million subscribers, and it may someday offer millions of customers fixed wireless service to bypass local phone companies. And Wireless is growing rapidly. But to value Wireless so close to AT&T Classic seems a reach for a variety of reasons. Among them: Classic’s profits from operations are nine times Wireless’s profits, and Wireless will need huge amounts of outside capital to fund its expansion. It sure looks like the Street is valuing AT&T’s stock low, Wireless’s stock high or both.
Then there’s the whining about how AT&T Wireless rose only 8 percent on its first day of trading. As if that’s a crime against nature. Grow up, fans. Lots of people seem to think that IPO stands for Insane Profit Opportunity rather than initial public offering. But the idea that IPOs all at least double in their first day of trading is a recent development. And a pernicious one. Until fairly recently, when Internet IPOs began doubling, tripling or quintupling on their first trading day, you expected an IPO to rise 5 to 15 percent out of the box. That’s because underwriters underpriced the shares slightly so the offering wouldn’t croak on its first day, and so they wouldn’t have to risk their capital buying stock to support its price. Now, though, many IPOs seem to come with an artificial scarcity of supply built in, and seem designed to rise several hundred percent the first day. This cynical ploy not only vastly enriches the insiders, but also serves as a marketing launch for the company.
AT&T Wireless is a throwback, old-style IPO. It sold a whopping 360 million shares, so there’s a relatively small short-term profit baked into the initial price. In addition, Wireless is a tracking stock. Trackers give holders a somewhat vague economic interest in a business that the parent company continues to own. You can see why trackers are generally better deals for the issuer than for the buyer.
And speaking of better deals, it’s getting to be time for AT&T to levitate its share price, which at Friday’s level was barely above its pre-tracker level of five months ago. Here’s the problem. AT&T will probably complete its purchase of cable company MediaOne in the next few months. If AT&T stock averages less than $57 for the 21 trading days before the deal closes, AT&T will have to shell out up to $4 billion of cash. Expensive. And embarrassing. So watch for something to happen if AT&T stock stays where it is. Like the creation of a tracking stock for AT&T’s big broadband business. AT&T’s leaders, who complain privately their stock is undervalued, are people of substance. But as the Wireless tracker shows, they can sure cook up some sizzle if they need it.
