Why I Sold My AT&T Stock

 | May 21, 2014 | 4:00 PM EDT  | Comments
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I've been thinking about AT&T's (T) acquisition of DirecTV (DTV) ever since the deal was announced this week. When I look at the numbers, it just doesn't add up.

But before I even break down the numbers, I have to say that I automatically question a purchase where the CEO believes it's a good idea to pay a record high price and then some for a company no matter how strategic that purchase may be to the business. Paying a high price is generally not a good investment strategy. It's a trade that normally I would expect someone to lose money on.

For the purposes of disclosure, let me say that I owned AT&T stock prior to the announcement of this deal. I bought the stock in February at $32 per share and I sold it on Monday, May 19, at $36.74 after the deal was announced.

As for why I sold, let me just repeat that I never think it's a good idea to buy at record high prices. And since I consider AT&T's CEO Randall Stephenson as someone who is essentially managing my money, I fired him by selling my stock. He should have bought when the stock was down (like I did) or left it alone. If DirecTV's stock price never came down then, fine, move on and try to find a different strategy to grow your business. One thing's for sure: If you overpay, it doesn't matter what your strategy is, you're probably never going to make any real money.

In terms of the numbers, the deal made even less sense. AT&T is paying around $50 billion for DirecTV. Actually, it's more like $67 billion because AT&T is also assuming all of DirecTV's debt. That is a very hefty premium. Consider that DirecTV earned about $2.75 billion in net profit last year. That means AT&T is paying about $24 for every dollar of new income that it gets from DirecTV. That is insane. Without considering the cost savings of the acquisition and the potential new business it may generate for AT&T, it means that it will take 24 years for AT&T to earn back its investment. Stephenson could've bought a Treasury note and done a lot better, so how smart is this?

What about those cost savings? Well, Stephenson said that the combined operation will result in about $1.6 billion in fewer expenses. Oh, wow, knock me off my feet, why don't you. That lets us take that $24 dollar payout for every $1 in income to $23.80 for every $1 in new income. Hooray!

What about additional business that AT&T can derive from bringing on DirecTV's content pipeline? After all, DirecTV has a contract with the NFL to broadcast games, and AT&T will now have access to that content. In fact, it's so important to AT&T that the entire deal is contingent upon DirecTV renewing its deal with the NFL.

Even if DirecTV suddenly doubled its $30 billion in annual revenue to be more along the lines of Comcast (CMCSA) (I don't see how that will happen) and raised its profit to 14% from its current 8.5%, like Time Warner Cable (TWC) (again, I don't see that happening), then Stephenson is still paying $7 for every $1 in new income.

Maybe that sounds better, but it still looks like pie in the sky and is grossly overpriced. The bottom line is that AT&T is probably "dead money" for a long time -- another example of Wall Street/M&A, ego-driven, overpriced deal making that highlights how so many CEOs and business leaders are just capable of one thing, and that is carelessly throwing money around with shocking degrees of investment naiveté. For this they earn millions and the workers, who really do build things and make them work, get less and less.

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