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‘Questionable’ Strategy. ‘Deteriorating’ Performance. Why Elliott Is Pushing for Change at AT&T.

The activist hedge fund firm has taken a $3.2 billion stake in the telecommunications giant.

Activist investor Elliott Management Corporation has set its sights on AT&T, disclosing a $3.2 billion stake in the telecommunications giant on Monday.

The hedge fund firm founded by Paul Singer also released a lengthy letter that called out the company’s “questionable” M&A record and “deteriorating operational performance.” Elliott is pushing for changes at AT&T, including selling non-core businesses and installing new leadership, arguing that such changes could push the company’s share price north of $60, a 65 percent premium to the current share price at the time of the letter’s publication.

“Elliott made the investment in AT&T — among its largest ever — because it exhibits a unique combination of historical underperformance, a depressed valuation, well-positioned assets, and a clear path forward to generate extraordinary value for shareholders and other stakeholders,” the activist firm said in a statement Monday.

According to the letter, AT&T over the last decade has “not only failed to keep pace with the broader market, but has actually underperformed by over 150 percentage points,” with its total shareholder return (stock price plus dividends) lagging that of the Standard & Poor 500 index by “well over 100 percentage points.”

“AT&T’s underperformance has been so severe and disappointing that it was dropped from the Dow Jones Industrial Average in 2015, an index that has included AT&T and its predecessors since 1939,” the letter stated.

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One of the major causes of AT&T’s underperformance, according to Elliott, has been the telecommunication giant’s recent pattern of mergers and acquisitions. Specifically, Elliott pointed to the company’s “damaging” acquisition of DirecTV and failure to purchase wireless competitor T-Mobile. The hedge fund firm also noted that AT&T “has yet to articulate a clear strategic rationale” for its recent $109 billion acquisition of cable company Time Warner.

“In just a matter of years, AT&T bought its way from a pure-play wireless and wireline business to what it today calls a ‘modern media company,’” the letter stated. “By contrast, its closest peer, Verizon, pursued the opposite path by reducing its wireline footprint and doubling down on the strong wireless market.”

In the letter, Elliott encouraged AT&T’s leadership to refocus the business on the wireless market, advising the firm to stake out a position as leading 5G network provider while divesting of businesses that serve as “distractions.” The hedge fund firm did not name specific businesses that should be sold, but suggested the company’s home security business, regional sports networks, Mexican wireless operations, and DirecTV as possible candidates.

Elliott also questioned whether AT&T currently has “the right team in place to execute and oversee it.” In the letter, the hedge fund firm hinted that AT&T’s board may need to replace one or more of the company’s executives. The activist investor also said it would like to hold a discussion with the board regarding the possible addition of new directors.

Shares of AT&T climbed on the news Monday morning, rising about 4 percent in the first hour of trading. By midday the shares were trading at around $37.25.

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