The term "go big or go home" does not correspond to the possible "go big and go home."
That's what Elliott Management seemed to suggest in its announcement Monday that it took a $ 3.2 billion stake in telecommunications giant AT&T. The activist hedge fund cited the company's history with dubious takeover decisions, including the purchase of DirecTV and Time Warner, and deficient operating results to justify the move to the company. In total, AT&T has spent about $ 200 billion on acquisitions in recent years.
There's a lot. You can't fault CEO Randall Stephenson for daring to turn AT&T from a wireless company into a wireless and media need. AT&T has a company value of around $ 270 billion with around $ 200 billion in debt. But being bold and being smart is not the same.
The biggest "whoa" moment from the hedge fund's letter may be that Elliott said the board should consider changes to AT & T's management. While the hedge fund stopped asking for Stephenson to be removed, it requested the addition of new board members and spent many paragraphs criticizing Stephenson's decisions, especially his three biggest M&A gambits: the failed $ 67 billion T-Mobile acquisition acquisition of DirecTV and $ 1
"AT&T has suffered from operational and execution issues over the past decade, for which the current leadership team is responsible," Elliott wrote in his letter. "There is no greater governance responsibility than evaluating the skills and experience needed to lead AT&T, with its current mix of assets, into the future. Especially given the recent management changes, this is the moment to determine the right team for the next For AT&T, its shareholders, customers and employees, the opportunity is too great, and the cost of still making mistakes is too high to get it wrong. "
That's pretty direct. Just last week, AT&T promoted WarnerMedia CEO John Stankey to head the entire company. Stankey was part of the team responsible for buying and integrating DirecTV and has led the effort to reshape Time Warner, now WarnerMedia, an effort that has already had several bumps in the road, as CNBC documented here. Elliott doesn't think Stankey should replace Stephenson as CEO, the source close to the company said.
Elliott said it has a four-part plan that could raise AT & T's share price to more than $ 60. AT&T increased by about 5% in the early market to about $ 38 per share. The proposal includes sections on improving strategic focus, operational improvements, a formal framework for capital allocation and strengthening management and supervision.
Whether AT & T's board will notify Elliott's sabotage is unclear. A $ 3.2 billion stake in a company is usually huge. It is hardly registered with AT&T, whose market value is more than $ 270 billion. The board doesn't have to do anything about Elliott's letter. However, sources near Elliott said it expects the board to get involved soon and try to settle. Elliott thinks Stephenson's exit is on the negotiating table, the sources said.
Stephenson's M&A decisions before Time Warner are ugly. And Time Warner, himself, is already raising questions. AT&T was buzzing about buying T-Mobile when the deal was blocked by regulators several years ago. As a settlement fee for that deal, AT&T ended up giving T-Mobile a seven-year roaming agreement and billions in wireless spectrum. These moves helped transform T-Mobile from a struggling competitor to a company that has grown faster than Verizon, AT&T and Sprint in recent years.
AT & T's decision to buy DirecTV for $ 67 billion was arguably worse, as AT&T has seen millions of satellite subscribers leave the service since the end of the deal in 2015. AT&T also sees subscribers on the flight from DirecTV Now (now called AT&T Now, which is not to be confused with AT&T TV), the digital Internet streaming replica of the supplied linear TV, having raised prices from $ 40 to $ 50 a month.
"It has become clear that AT&T bought DirecTV at the absolute top of the linear TV market," Elliott wrote in his letter.
And Elliott is skeptical that Time Warner makes sense for AT&T, about three years after Stephenson announced that his company had agreed to buy the media giant.
"AT&T has not yet formulated a clear strategic rationale for why AT&T needs to own Time Warner," the hedge fund wrote.
In a statement in response to Elliott's letter, AT&T said they plan to look at Elliott's proposal and are already working on some of the strategies the company is advocating. AT&T did not answer questions about Elliott's preference for Stephenson to step down as CEO.
"AT & T's board and leadership team are convinced that the focused and successful implementation of our strategy is the best way forward to create long-term value for shareholders," the AT&T statement said. "This strategy is driven by the unique portfolio of valuable businesses we have put together across communications networks and media and entertainment, and as Elliott points out, the foundation for significant value creation. We believe growing and investing in these businesses is the best way forward for our company and our shareholders. "
Elliott also cited an exclusive CNBC interview with ex-Time Warner CEO Jeff Bewkes, in which Bewkes explained some of the shortcomings of vertical integration as a strategy. Elliott said Bewkes used a divestment-based strategy to create value for Time Warner shareholders, the opposite of the conglomerate-based strategy AT&T pursues.
"We see a contrast between AT & T's M&A strategy and that of Time Warner under Jeff Bewkes: When Bewkes took over Time Warner as CEO, he inherited a sprawling company with many related but not core businesses – AOL, Time Warner Cable, a collection of publishers and other smaller businesses, then spent the following decade disposing of non-core assets to focus on Time Warner's leading content franchises, "Elliott wrote in his letter.
"AT&T has pioneered its M&A strategy: Most companies today no longer seek to assemble conglomerates … We are convinced that AT&T's M&A strategy not only has contributed directly to the deep underperformance of stock prices, but also caused distractions that contributed to the company's recent operational and erper performance. "