Targeted Stocks: Focused Strategy or Hocus Pocus?

Content may be king, but image is everything. And as diversified corporations prepare to cruise the information highway in search of profits, some have decided it's better to drive a sexy sports car than a staid station wagon.

Telephone and cable companies are among the most active industries figuring out how to milk the expected information cash cow. Most have visions of techno-grandeur predicated upon their collective promise to someday, somehow, deliver futuristic, interactive, multimedia services on demand.

But strip away the hype surrounding these various fiber-to-the-discretionary-income schemes, and what are you left with besides press releases and regulatory filings? Not much beyond companies that continue to derive the overwhelming majority of their income from the ho-hum business of connecting telephones or sating couch potatoes.

These interactive ambitions will take years and cost billions to realize, and

while they may indeed one day yield riches worthy of Midas, for now they remain a big fat drain on earnings. For instance, unlike the guaranteed rate of return US West is entitled to as a regulated utility, the company's developing businesses "are in a stage of rapid customer growth and network expansion, which temporarily dilutes total-company earnings," said Richard McCormick, the Baby Bell's chairman and CEO.

Read: These things cost a ton of money and hurt the bottom line. The end result, at least in the short term, is a bruising on Wall Street and disgruntled shareholders.

"We have received wide recognition and support for our long-term strategy," complained McCormick. "But we have felt for some time that the financial market is undervaluing our stock."

McCormick attributes this situation to US West's pursuit of new business lines whose fundamentals, financial indicators and other measures of value are vastly different from the company's telephone business.

So what's a plain-Jane corporation with dreams of cyberspace to do? Both US West Inc. and Tele-Communications Inc. have proposed splitting their common stock into two classes to boost share prices, increase their ability to fund new ventures and remain single corporate entities.

TCI, the nation's largest cable concern, wants to create an eponymous stock to track its currently unfashionable cable business. The other stock, Liberty, would track TCI's lucrative stake in red-hot programming assets, content that includes the Discovery Channel, Turner Broadcasting and the Home Shopping Network.

"It's completely logical. Content is where the money is, and what everyone is looking for," said Matt Ward, executive compensation western region practice leader with Watson Wyatt.

McCormick's US West, a telephone company that describes itself as being in the "connections business," proposes that shares of US West Communications Group follow the Western Baby Bell's local telephone business and pay quarterly dividends. US West MediaVision Group stock, meanwhile, would track the performance of the company's budding infobahn business, which includes video, cellular and international activities, but pay no dividend.

Marion Boucher, managing director and senior telecom analyst with Bear Stearns, applauds US West for being interested in future businesses, but said the company' actions are a case of style over substance.

"This is all sort of smoke and mirrors, like rearranging the kitchen to make it more attractive or exciting," said Boucher. "The reality is that it is still the same kitchen and the same corporate reality."

Ward disagrees, and points out that diverse companies trying to embark upon high-tech endeavors, especially regulated utilities such as the Bells, may find the value of these new ventures hampered by their less-than-thrilling core business. So creating targeted stocks, he said, makes good sense.

"These companies are doing more than renaming stock. They are allocating a big chunk of their capital to that entity, and then people can separately trade in those shares that are publicly traded in the marketplace," he said. "I think it is a good idea, particularly for companies in distinctly different lines of business."

However, Ward added, creating new, targeted stocks is a painstaking process fraught with financial complexities. And all a company's efforts to that end are sometimes for naught. Watson Wyatt, he said, helped K Mart execute a similar strategy, only to have shareholders vote down the plan. Both TCI and US West require similar approval.

And just what the trading market for these subsidiaries might be, Ward said, remains to be seen. The most famous example of internal subsidiary stocks, General Motors and its EDS E-shares and Hughes H-shares, he said, "haven't been robust for GM."

Nonetheless, Ward said he expects other companies to follow suit. "To the extent companies can work through the issues," he said, "I think it really is the wave of the future for large public companies that are getting into joint ventures and alliances to enter into the information highway, multimedia and other types of technology business."