At AT&T (NYSE: T) stock is showing this morning it’s actually possible for a stock price to rise as it falls. So, for those checking their accounts this morning and seeing the AT&T price has dropped 23% really, don’t have a cow over this. At pixel time the actual position is up 1.3%.
The secret here is that the demerger of the Warner Brothers Discovery business has just taken place. Or at least the two stocks are now trading independently and that’s what has shifted the AT&T price.
So, the action is that AT&T is down that 23%. From the $24.14 of Friday’s close to $18.6x (it’s moving a little) at our pixel time. But anyone who owned an AT&T stock on Friday now also owns one AT&T share plus also 0.241917 (which is possibly a little more accuracy than we actually need) of a share of WBD. Which is trading at $24.45 (again at pixel time, it is moving a little). So, $24.45 x 0.24blah gives us a value of $5.89. We need to add that back into the $18.6x AT&T price to get to the valuation of the whole bundle.
Doing that and comparing with Friday’s close gives us that true price of up 1.3%.
As to why the merger with Discovery, the demerger from AT&T, it’s the old and standard difference between a conglomerate and a focused company. These things can and do go in and out of style and the fashion in these recent years has been that a company should stick to its knitting. The is a side effect of, would you believe, all that HFT and financialisation of the economy. It’s very much cheaper now to raise money than it used to be – there’s much more liquidity in the market.
The value of the old conglomerate model was that earnings from one line of business could be used to finance some other. Or, to invest in an entirely new line of business and so on. Sometimes this worked and sometimes it didn’t but the argument in favour was that raising new money from the markets came at a considerable cost. Now that price is lower that argument in favour of internal capital allocation fades away. It’s more sensible – more sensible than it used to be – to pay out earnings to stockholders and they can make their own capital allocation decisions.
So, conglomerates like AT&T spin-off operations that are not part of the core business. Which is exactly what has been done here with Warner Brothers Discovery.
Leaving us with that interesting discovery that a 23% fall in the stock price is in fact a 1.3% rise in the total valuation. Simply because we’ve now got to add the two parts together, here on Monday, to be able to compare to the valuation of last Friday.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.