The Man with the Midas Touch

My father-in-law, Lou Harding, was a brilliant businessman. He found angles and opportunities that others missed. For instance, he and his partner once bought the right-of-way of an old railroad line because he knew telecom carriers would want it to lay fiber-optic cables.

My favorite story about Lou’s business acumen also has a telecom angle – it involved AT+T.

AT+T was the bluest of blue-chip companies, paying regular dividends each quarter for decades, and was a staple for pension funds and widowers because it was such a safe investment. It was the most widely held stock in the U.S. So anything impacting AT&T had a monumental affect on America.

In the early 1980s, that impact came. The U.S. Justice Department was breaking up AT+T. “Ma Bell” had a monopoly on local phone service via its network of local operating companies, and there was very little long-distance competition. If you wanted to use an alternate carrier, such as MCI, you had to dial an 800 number, enter your 10-digit account code, then enter a PIN, then dial the number you wanted to call – or something around 30 digits to place a call!

What’s more, you weren’t allowed buy a phone and plug it into the network. You had to rent a phone from AT+T’s manufacturing unit, Western Electric.

The consequence of the divestiture, as it was called, was AT+T was broken up into pieces: AT+T would continue to offer long-distance service, and would be allowed to enter other competitive industries, particularly information systems; and the local phone companies were spun off and grouped into seven regional holding companies, or RHCs.

Stockholders would receive one share of each of the holding companies for every 10 shares of AT+T stock they held. So if you held 10 shares of AT+T stock before divestiture, you would now own seventeen total shares -- your 10 AT+T shares, plus one each of Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West.

What was the smartest play with these new stocks? Should shareholders sell their RHC stocks and plow them back into the new smaller AAT+T – or the other way around? Which holding company would do best? AT+T desperately wanted to enter IBM’s computer business – should investors load up on Big Blue, as IBM was known?

Analysts, market research firms, investment banks, and other pundits made fortunes with their predictions about the future landscape. In fact, I spent years covering it for multiple publishing companies (I didn’t make a fortune, however).

The bottom line was, nobody knew what was going to happen, and nobody had a crystal ball.

So how did Lou figure out how to profit from the AT+T divestiture? He certainly didn’t know whether one RHC would outperform another, or if AT+T stock would shine, or if IBM would each AAT+T’s lunch in the computer business. Instead of trying to navigate through that maze, he realized that the company that printed AT+T’s stock certificates (companies issued paper certificates in those days) would be printing a whole lot more. That’s where he placed his bet – he invested in the printing company!