JUST THREE EASY PIECES

By GEORGE J. CHURCH

Can a company be just too darned big? Trustbusters and federal judges have often said so. But for the chief executive of a corporate colossus to agree sounds contrary to nature. And for said chief to insist, entirely voluntarily, on busting up his own company into three pieces--well, only last week did the idea change from unheard of to heard of once. In laconic tones, chairman Robert Allen announced at a Manhattan press conference that he had persuaded the AT&T board to break the company into three independent corporations. It will be the biggest corporate split-up ever, as measured by the stock-market value of the splitting company. Not even the court-ordered breakup of AT&T 11 years ago into seven Baby Bell phone companies and one everything-else corporation comes close.

The sheer size of the breakup, and the secrecy in which it had been planned--Wall Street had heard not a whisper of what Allen was up to--would have made the announcement sensational enough. But the timing and reasoning were more surprising still. The breakup runs squarely counter to the most publicized trend in American business: the move toward bigger and bigger mergers, like the one agreed on by Time Warner and Turner Broadcasting two days later.

Moreover, Allen in his understated way was voicing some stunning heresies--stunning for an AT&T head anyway. The company had long been almost synonymous with Big Business, and for more than a century a paragon of vertical integration--the tying together of suppliers and customers into one company. But now Allen calls vertical integration "an idea whose time has passed" and says that "we've reached the point where the advantages of our size will be offset by the time and costs in coordinating and integrating sometimes conflicting business strategies." Translation: the company's parts, notably telephone service and equipment manufacturing, are starting to get in one another's way.

And what of synergy, the idea that different but related businesses can be combined into a whole greater than the sum of the parts? Allen was a big booster in 1991, when he engineered a $7.4 billion hostile takeover of computer-making NCR. But while the marriage of computers and communications might seem a natural, AT&T could never make it work. For the first three quarters of this year, the computer business lost an estimated $500 million.

In hindsight, the price AT&T paid for NCR was too high, and the situation was soon complicated by recession. Says Michael Porter, a professor at Harvard Business School: "Everyone knew at the time NCR was a third- or fourth-rate computer company, but somehow AT&T thought they could put it together and there'd be all this synergy." Charles Exley, who quit as NCR's CEO the day the merger took effect, chose not to crow about the results of Allen's folly. Says Exley, who now sails the world on his yacht: "Perhaps now NCR can go about its business once again."

Putting asunder what AT&T had joined together will take until the end of 1996. Then AT&T's 2.3 million shareholders--more owners than any other U.S. company can boast--will receive stock in each of three companies:

The core business: long-distance phone service, the recently acquired McCaw Cellular phone subsidiary, and credit cards. Name: still AT&T. Revenues: $49 billion a year, based on 1994 figures. Profits: more than three-quarters of the $4.7 billion AT&T earned last year. Chief executive: Allen. (He has named Alex Mandl, his heir apparent, to oversee the transition to the slimmed-down AT&T.) Employees: 121,000.

Equipment manufacturing (phones, switching gear, computer chips) plus most of the legendary Bell Laboratories research operation. Name: not yet chosen. Revenues: $20 billion a year. Profits: an estimated $1 billion. Chief executive: Richard McGinn. Employees: 137,000.

Computers. Name: Global Information Solutions. Revenues: $8 billion. Profits: below zero. Chief executive: Lars Nyberg. Employees: 43,000 initially, but 8,500 will be laid off as the company stops making personal computers.

The idea that three pieces can add up separately to more than they did as a whole was widely praised. Wall Street, which had been quietly pressing Allen to do something about the stagnating price of AT&T stock, was almost ecstatic. The price jumped nearly 11% on the day of the announcement, to $63.75 a share; the stock ended the week at $63.37. Says Tim Price, president of rival MCI Telecommunications: "AT&T was a good competitor in the past; it is still a formidable competitor; it will be a better competitor now."

Actually, the breakup is not all that revolutionary. While mergers have got the headlines lately, the downsizing trend has been at least as important (and AT&T has been a leader; it has eliminated 140,000 jobs since 1984). Nor are split-ups and spin-offs a minor part of that move: one study counts nearly 100 sizable new companies formed by such breakups since 1992. Many, however, were deconglomerations of unrelated businesses, such as ITT's recent three-way division, rather than split-ups of tightly knit operations like AT&T.

Whatever advantages it once had, however, AT&T's integration was putting it into the uncomfortable position of supplying its competitors and competing with its customers, notably the Baby Bells. They buy much of the equipment made by AT&T, and that market ought to grow because the Baby Bells are replacing their old analog switches in central offices with digital switches that cost at least $500,000 each. But the Baby Bells have been turning to foreign suppliers, largely because they do not want to enrich a competitor in phone service.

New technology is enabling Ma Bell to muscle back into the local markets turned over to the Baby Bells by the 1984 court-ordered divestiture. It can do this now by offering cellular-phone service and later by setting up networks of PCS (personal-communication services) phones. These are new wireless, portable phones. AT&T might also link up with cable-TV companies to route phone calls over TV cables.

The telecommunications deregulation bill that is awaiting a House-Senate conference would hasten this process. It would require all local telephone companies to open their networks to these new services so that a call placed on a PCS phone could be put through to a conventional phone on an office desk, and vice versa. Ominously to AT&T, the bill would also allow the Baby Bells and other local phone companies to enter the long-distance market.

Actually, the bill may not become law until after the 1996 elections, if then. But deregulation is coming anyway: several states already require local phone companies to open their networks to AT&T and others. In any event, splitting up will allow AT&T to go after both local and long-distance competition without fear of causing a disastrous loss of equipment sales; similarly, the separate equipment company will no longer scare off customers fearful of fattening a competitor.

Where does the computer business fit in? The problem is that it never did. Why not is hard to say: the rapidity of change and obsolescence of products in the business may well be better mastered by a nimble, specialized company than by one that becomes part of a giant like AT&T.

None of which proves that vertical integration is always a mistake, or that corporate giantism is naturally inefficient. Indeed, in a similar move to the NCR acquisition, AT&T paid $11.5 billion for McCaw in 1993 and still hopes that the purchase will pay the corporation's way into the cellular-phone market. And with around $50 billion in revenues, AT&T will still be a titan after the breakup, and so will the two companies to be born from it.

With the computer losses alone, anyone would have realized that a mistake had been made. Still, Allen has won the admiration of competitors, investment analysts and business professors by admitting at least by implication that the ideas that guided his previous 38-year career with AT&T were wrong and reversing course after seven years at the helm. For a major corporate executive, that is almost as rare as breaking up the very symbol of Big Business.

--Reported by Tom Curry, Thomas McCarroll and Barbara Rudolph/New York

With reporting by TOM CURRY, THOMAS MCCARROLL AND BARBARA RUDOLPH/NEW YORK