The expression "go big or go home" doesn't equate to the possible "go big and go home."
That's what Elliott Management seemed to be suggesting in its announcement Monday that it's taken a $3.2 billion stake in telecommunications giant AT&T. The activist hedge fund cited the company's history of questionable acquisition decisions, including buying DirecTV and Time Warner, and lackluster operational performance to justify its move into the company. In all, AT&T has spent about $200 billion in recent years on acquisitions.
That's a lot. You can't fault CEO Randall Stephenson for being bold in turning AT&T from a wireless company to a wireless and media behemoth. AT&T has an enterprise value of about $270 billion with about $200 billion in debt. But being bold and being smart aren't 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 leadership. While the hedge fund stopped short of calling for Stephenson's removal, it did call for the addition of new board members and spent many paragraphs criticizing Stephenson's decision-making, particularly his three largest M&A gambits: the failed purchase of T-Mobile, the $67 billion acquisition of DirecTV and the $104 billion takeover of Time Warner. But sources close to Elliott's thinking said the firm would prefer for Stephenson to step down as CEO.
"AT&T has suffered from operational and execution issues over the past decade, for which the current leadership team is accountable," Elliott wrote in its letter. "There is no greater Board responsibility than to evaluate the skills and experience necessary 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 decade. For AT&T, its shareholders, customers and employees, the opportunity is too great, and the cost of continued mistakes too high, to get it wrong."
That's pretty direct. AT&T just last week promoted WarnerMedia CEO John Stankey to chief operating officer of the entire company. Stankey was part of the team responsible for buying and integrating DirecTV and has been leading the effort to reshape Time Warner, now WarnerMedia, an effort that has already had several bumps in the road, as CNBC documented here. Elliott does not think Stankey should replace Stephenson as CEO, the source close to the company said.
Elliott said it has a four-part plan that can boost AT&T's share price to more than $60. AT&T rose about 5% in early market trading to about $38 per share. The proposal includes sections on improving strategic focus, operational improvements, a formal capital allocation framework and enhanced leadership and oversight.
Whether AT&T's board will take notice of Elliott's saber rattling is unclear. A $3.2 billion stake in a company is typically huge. It barely registers at AT&T, whose market capitalization is more than $270 billion. The board doesn't have to do anything with Elliott's letter. However, sources close to Elliott said it expects the board to engage soon and try to settle. Elliott thinks Stephenson's exit is on the negotiating table, the sources said.
Stephenson's M&A decisions prior to Time Warner are ugly. And Time Warner, itself, is already raising questions. AT&T whiffed on buying T-Mobile when the deal was blocked by regulators several years ago. As a breakup fee for that deal, AT&T ended up providing T-Mobile with a seven-year roaming deal and billions in wireless spectrum. Those moves helped transform T-Mobile from a struggling competitor into 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 watched millions of satellite subscribers leave the service since closing the deal in 2015. AT&T is also seeing subscribers flee DirecTV Now (now called AT&T Now, which is not to be confused with AT&T TV), the digital internet streaming replica of bundled linear TV, after raising prices from $40 to $50 a month.
"It has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market," Elliott wrote in its letter.
And Elliott is skeptical that Time Warner makes sense for AT&T, about three years after Stephenson announced his company had agreed to buy the media giant.
"AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner," the hedge fund wrote.
In a statement responding to Elliott's letter, AT&T said it plans to look at Elliott's proposals and is already working on some of the strategies the firm advocates for. AT&T did not respond to questions about Elliott's preference for Stephenson to step down as CEO.
"AT&T's Board and management team firmly believe that the focused and successful execution of our strategy is the best path 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've assembled across communications networks and media and entertainment, and as Elliott points out, is the foundation for significant value creation. We believe growing and investing in these businesses is the best path forward for our company and our shareholders."
Elliott also cited an exclusive CNBC interview with ex-Time Warner CEO Jeff Bewkes, where Bewkes explained some of the flaws in 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 is pursuing.
"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 numerous related but non-core assets — AOL, Time Warner Cable, a collection of publishing assets and other smaller businesses. He then spent the following decade divesting the non-core assets in order to focus on Time Warner's leading content franchises," Elliott wrote in its letter.
"AT&T has been an outlier in terms of its M&A strategy: Most companies today no longer seek to assemble conglomerates. ... We firmly believe that AT&T's M&A strategy has not only contributed directly to its profound share price underperformance, but has also caused distractions that have contributed to the company's recent operational underperformance."