Wall Street's Day of AWE: AT&T's Tracking Stock, AWE, Didn't Set the World on Fire-But Then Again, Why Did Anyone Expect It To?
Sloan, Allan, Newsweek
If you want an example of how Wall Street places a higher value on sizzle than on steak, consider AT&T and the so-called "tracking stock" tied to AT&T's wireless business. When news broke last November that AT&T would issue a tracking stock that would give holders an economic stake of sorts in its wireless business, Wall Street ran up AT&T's stock from the mid-40s to 60 in a week, adding $40 billion to AT&T's stock-market value. A huge move, considering that nothing had changed other than the pieces of paper that AT&T was going to give its owners.
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. …