Minority Stakes

Minority Stakes

Minority Stakes

Moneybox
Commentary about business and finance.
April 13 1999 7:40 PM

Minority Stakes

Ordinarily, last week's announcement that Ameritech would be selling half of its wireless telephone operations to GTE for $3.3 billion would have occasioned little notice. Ameritech is being acquired by SBC Communications, and in order for that deal to pass muster with the FCC, Ameritech had to sell its wireless operations in Chicago and St. Louis, where SBC also offers service. So the sale was a foregone conclusion.

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What wasn't quite as expected was that the deal would, as the New York Times put it, end up being "the first major telecommunications acquisition to be described as a 'step forward' for racial diversity." That's because GTE offered Georgetown Partners, a private investment firm whose managing director is black, 7 percent of the equity in the wireless business in exchange for $60 million in cash.

Georgetown Partners has no previous experience in the telecommunications business, and even if it did have any experience it's hard to see what influence the owner of a 7 percent minority stake of one division of a company the size of GTE could possibly have. Of course, GTE wasn't looking for a noisy partner. Actually, all indications are that it wasn't looking for a silent partner, either. But SBC was looking for a way to look good in front of FCC chairman William Kennard, who has said that he wants to increase minority participation in the telecom industry. So GTE decided that owning the wireless operations with Georgetown was better than not owning them at all.

This is, in other words, exactly the kind of thing that gives affirmative action a bad name. In the Times yesterday, Davenport happily admitted that he was the recipient of preferential treatment, arguing that if he had been white he would already have "100 times more money than I have." But even if that were in fact the case, William Kennard--and Jesse Jackson, whose Wall Street initiative seems to have played some role in this deal--has better things to do than help someone worth $100 million become worth $10 billion. Affirmative action, whatever its flaws, had the noble goal of giving a chance at real success to those who wouldn't otherwise have had that shot. We're all ill-served when it's turned into a mere spoils system, and when it consists of giving someone who's already really successful the chance to be really really successful.

That's especially true in this case, where Georgetown is literally bringing nothing important to the table: no telecom experience, no managerial experience, and no real marketing experience. Even the money is essentially irrelevant, since GTE hardly needed a partner to come up with that extra $60 million. All this is is an unearned gift.

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Now, Wall Street is hardly the home of pure economic rationality, where nepotism and connections play no role at all. The Street still in many ways relies on an old-boy network, and insofar as that locks out black financiers and entrepreneurs, we're all hurt (both morally and economically). But there's a difference between something like AT&T's recent bond offering, in which the black-owned Blaylock & Partners was named a co-manager, and the GTE-Ameritech deal. In the former case, Blaylock & Partners was competing against its peers for business that it was qualified to do. If race played any part in AT&T's decision to say yes, it was only to ensure that race didn't play a part in a decision to say no. If Georgetown hadn't been included in the GTE deal, no other investment firm would have been. I don't know what you call it, but it's certainly not equal opportunity.

The really astonishing thing about all this is the nakedness of SBC's ploy. In a statement it released on the day the deal was announced, SBC actually said that creating diversity was an important goal "for a number of parties, not the least of which is the FCC," then described the deal as allowing the company to do "good by achieving the goal of expanding diversity within the ranks of industry ownership."

Even if you set aside the use of the words achieving and ownership to describe a 7 percent stake by a company with no telecom background, this statement is painful precisely because SBC makes no bones about the fact that the only reason it's including Georgetown is because Kennard wanted it to. SBC might just as well have said: "OK, Bill. Are you happy now?" The only question that remains is whether the parties to this deal are self-deluded about the supposed virtue of their action or else deeply cynical. Actually, I think we know the answer.