Bringing Concert in tune

Turning Concert into a wholly owned subsidiary would allow AT&T to set specific goals for the venture and see those goals through.

Even before Concert got off the ground, expectations for the joint venture had dwindled.

In the summer of 1998, AT&T and BT announced they would form a 50/50 joint venture to provide communications services to multinational corporations. At the time, the parent companies predicted the venture, which would become Concert, would generate $10 billion in annual revenues.

But by January 2000, when the Concert transaction was officially closed, revenue projections had shrunk to $7 billion, and things have gone downhill since.

For 2000, Concert made its lowered revenue target of $7 billion but missed earnings. More recently, for the quarter ended March 31, BT alone took a pro forma operating loss of approximately $123.6 million from the venture.

“Concert is operating in a highly competitive international market, and the recent fall in prices for carrying international traffic contributed to the loss for the fourth quarter,” BT said in a press release.

Even considering the effect market conditions may have on the venture's performance, clearly many of the causes for the shortfall lie with Concert itself. Many problems can be traced to its operational structure, analysts said.

As a 50/50 joint venture, Concert is flailing because it has no clear leader, said Jim Rawitsch, managing director of The Aberdeen Group.

“Whenever you go into a situation where power is equally shared, it becomes like a marriage. In order for anything to happen, both have to agree. If one partner had 51%, it would be easier. You have egos at stake and different business aims at stake,” he said.

In such a situation, employees of the parent companies that work with the joint venture are likely to put the venture's interest on the back burner. This reportedly is the case with Concert.

In addition, the venture may suffer from lack of attention from the leadership of AT&T and BT.

Both companies are dealing with turning points in their core businesses: AT&T is in the midst of a self-imposed breakup, and BT is wrestling with debt it amassed in the European 3G spectrum auctions.

A possible solution is for one of the parent companies to take a controlling interest in Concert, thereby giving the venture a clear leader that is committed to Concert's success.

The discussions between AT&T and BT reportedly are centered on just such a solution, with AT&T expected to take a managing interest in Concert.

This possible course of events makes sense because it could serve to lower BT's debt while helping to solidify AT&T after the breakup, said Sandra Palumbo, analyst with The Yankee Group.

“Concert would primarily fall under AT&T Business Services,” she said. “Concert would fit nicely with that by enhancing its international presence and allowing AT&T to be considered a large international carrier, which could be a good thing for them as they stand alone.”

Rawitsch suggested that a more likely scenario would involve AT&T buying out BT's stake in the venture rather than simply acquiring a controlling interest.

AT&T and BT have been in talks off and on regarding Concert's future since at least last fall. Because of these ongoing talks, representatives from Concert declined to comment.

Turning Concert into a wholly owned subsidiary would allow AT&T to set specific goals for the venture and see those goals through. If AT&T took only a controlling interest, with BT holding a minority, the institutional problems of a 50/50 joint venture would be settled, but the majority owner still would have to deal with many of the same operational issues.

That also is why talk of floating the venture on the stock market does not make sense, Rawitsch said. Simply shifting ownership won't solve operational issues. Concert needs one leader that can force its agenda upon the venture.

History, in fact, supports this idea. Global One, another provider targeting multinational corporations, was first formed as a joint venture between France Telecom, Deutsche Telekom and Sprint. Under that ownership structure, the venture flailed for four years. In January 2000, France Telecom agreed to buy out its partners for $4.3 billion in cash and debt.

“They were all equal partners for the most part,” Palumbo said. “No one was taking leadership, and I think Concert is experiencing the same things…. Once France Telecom took over, Global One did start turning things around.”

The troubles experienced by Concert and Global One reflect risks inherent in the nature of joint ventures.

“It is hard to get two strong, able companies to agree on working together about anything, particularly in a 50/50 arrangement where neither one has any real incentive to cooperate,” Rawitsch said. “There's no real motive to cooperate if a joint venture's plans conflict with the parents' more immediate needs. That's why joint ventures have a bad history.”

Concert's troubles do not stem from a lack of investment. To form the venture, AT&T and BT contributed assets valued at $3 billion and operations that generated annual revenues of $7.8 billion for the fiscal year ended March 31, 1998.

But money isn't enough — cooperation is crucial.

“I think as long as it's possible to make money, the participants always want joint ventures to succeed,” Rawitsch said. “Desire, though doesn't always match with reality. Agreeing on paper doesn't mean it can work in reality.”

Problems faced by joint ventures can be exacerbated in a venture the size of Concert, which must coordinate strategy, operations and initiatives on a global scale. In addition, parent companies in global joint ventures are more likely to have cultural differences that may affect planning and strategy, Palumbo said.

These are lessons that AT&T probably has learned. Going forward, Rawitsch said, AT&T likely will continue to strike partnerships and acquire companies around the globe, especially now when globalization is meeting an economic shakeout and has forced industry consolidation.

AT&T probably will take a closer look at the nature and size of any ventures it enters into, Palumbo said.

“I don't think a large international carrier will rule out the possibility of joint ventures. I do think, though, they will look long and hard before they invest as much as they did in Concert,” she said.

Concert's original expectations

When Concert was first formed, AT&T and BT made large initial investments resulting in high expectations that have not been met.

BT investment: Operations with annual revenues of $2.3 billion and fixed assets of $1 billion

AT&T investment: Operations with annual revenues of $300 million and fixed assets of $2 billion

Expected first year revenue: $10 billion

Expected annual revenue growth: 15%+

Expected first year operating profits: $1 billion

Expected annual operating profit growth: 15% to 20%

Source: Concert

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Compiled by Toby Weber