The publicly traded companies created from the AT&T breakup — the seven so-called Baby Bells — outperformed the U.S. market.
It’s possible that splitting Google into several different companies will be good for Alphabet GOOGL 1.03% shareholders in the long run.
Investors didn’t react that way when the U.S. Justice Department said it was thinking about doing something like that after the company lost a huge trade case. Alphabet (Google’s parent company) shares fell 2.3% on August 14, the first trading day after the Justice Department’s news. The S&P 500 SPX 0.20%, on the other hand, rose 0.3%. On August 15, Alphabet shares went up 0.6%, but that wasn’t as much as the 1.6% rise in the S&P 500.
In order to understand the long-term effects of a company split up ordered by the U.S. government, investors should look at the breakup of AT&T T 1.31% in the early 1980s. The seven companies that were made from this merger—the so-called “Baby Bells”—performed better than the U.S. stock market for many years.
This is hard for most of us to understand now, but AT&T, or “Ma Bell,” was just as important to the U.S. economy back then as Google is now. According to a 1993 story in The New Yorker by James Stewart, a former professor at Columbia’s Journalism School, AT&T’s chairman called the Justice Department’s plan a “national catastrophe” that the company would “fight to the death.”
The difference between how well AT&T and the Baby Bells’ shares did after the breakup and how well IBM shares did tells us a lot about what really happened.
In the 1970s, the Justice Department tried to break up IBM but failed. In the early 1980s, the government dropped its case against IBM on the same day it said AT&T would be broken up. The chart below shows that IBM’s stock not only lagged the market over the next one, five, and ten years, but it also did much worse than AT&T and its spinoffs.
When Stewart wrote his 1993 look back at AT&T and IBM, he said, “Nearly everyone in the computer industry agrees that, after its antitrust victory, IBM retreated into the mainframe world it dominated—a strategy that worked in the short term but has now proven disastrous.”
Of course, AT&T’s success after the split is only one example, so it’s not possible to draw strong data conclusions from it. Still, it’s a strong warning that our first thoughts and feelings aren’t always right.
In 1988, Robert Allen became CEO of AT&T. He said, “The divestiture forced us to make changes that were probably good for us.” “It was hard at times, but it paid off.” We may have been luckier than IBM because we had to make the change.
