Once
a corporate icon, AT&T finally yields to a humbler role.
Two
lessons:
1.
No
company is safe from change
2.
Don’t
forget customers!
After
more than a century of binding America with sound waves and wire, AT&T
Corporation, once the country’s biggest, wealthiest and strongest company,
itself is unraveling!
Just
a few decades ago, AT&T seemed like a paragon of corporate success and
endurance. It offered the cheapest and best telephone services in the world as
available and affordable to a Nebraska homesteader as it was to a Wall Street
broker.
The
laboratories of the Bell System, as the company was known until 1984, were the
world’s undisputed leaders in technological research. The companies millions of
widows and orphans stockholders enjoyed a generous and dependable dividend. If
ever there was a company that seemed for the future, AT&T was it!
But
AT&T grew fat and complacent in the 1970s and 1980s. While the
telecommunications market was getting lean & hungry. After 1984, a consent
degree forced the company to spin off into four its local phone companies.
AT&T
struggled with the ambitious missions in a battlefield that kept changing,
trying to serve all its customers transmission needs, business or residential,
voice or data, cable or wireless.
AT&T
announced October 26 that it would split into four distinct units closed an era
in the telecommunications market as its oldest combatant conceded defeat on its
latest attempt to be all things to all people. Theodore Vail, former Chairman,
coined the phrase, “one system, one policy, universal service.”
Current
Chief, C. Michael Armstrong, spent more than $100 Billion on cable systems in a
vain effort to achieve the same goal in the era of broadband information
networks. Now, AT&T is finally acknowledging that it can’t pursue that goal
anymore.
The
story of AT&T’s 115-year rise and fall illustrates two simple lessons of
American capitalism. The first is that no company, however large and
prosperous, is safe from the convulsions of social, economic and technological
change. Who could have predicted, during the Bell System’s halcyon days of the
1950s and 1960s, that the company was turning into its own worst enemy?
With its revenue secure and growing, and its markets protected from competition, AT&T’s combative muscle atrophied. Federal and state regulators capped its profits, so the company placed little value on entrepreneurial ventures. Exempt from the boom and bust of business cycles, AT&T developed few systems to soften the impact of a shrinking or expanding work force. Its managers were homegrown and so inculcated with the company dogma that they were called “Bellheads.”
The
second lesson began to hit home after 1984. When Ma Bell lost its local
service, it lost a vital connection to its customers, millions of employees and
the market place. No longer was it Ma Bell, everyone’s mother who took care of
her children’s needs. And with that loss came a decline in the political clout
the company had always taken for granted.
In
its youthful days, the company was a model of cutthroat aggressiveness. In
1902, Bell was competing with more than 1,500 independent telephone companies.
But because it controlled all long-distance lines, Bell could limit
competitors’ growth simply by denying them connections to the national network.
Bell
also cut rates in competitive markets and refused to sell its patented
telephone equipment to non-Bell companies.
The company’s banker, J.P. Morgan & Co., used its influence to
prevent competitors from getting lines of credit, and many undercapitalized and
under equipped independents were absorbed into the Bell system. Bell painstakingly developed a
public-relations strategy to persuade both customers and the government that
the telephone system was a “natural monopoly” – efficient, uniform, and
reliable service in exchange for “rational” profits.
For
the rest of AT&T’s life, its monopoly status would be a double-edged sword,
and its relationship with the government frustratingly unpredictable. Although
the Department of Justice had granted AT&T its competitive protection in
1913, many government officials vehemently opposed the idea that a private
company should control a system essential to the security and stability of the
nation. Competition was a natural regulator, many people believed, and
consumers would always be at a disadvantage in a contest with a monopoly.
At
various times in its life, AT&T has faced challenges from Congress, the
Interstate Commerce Commission, the Federal Communications Commission and the
Department of Justice. Concern about AT&T’s size and power has waxed and
waned with the political climate – antitrust suits were filed in 1913 and 1949,
and the FCC conducted a lengthy investigation in the 1930s. Aside from minor
concessions, however, Ma Bell survived these attacks, and its power and
influence grew.
Yet
AT&T’s safety from competition also fostered a management culture that
ultimately would play a large part in the company’s undoing. AT&T’s
managers saw profit as a way to support and extend the monopoly, not an end in
itself. Cost control was an issue less for corporate efficiency than for
ensuring that outlays didn’t upset the company’s regulatory overseers. With
customers taken for granted, sales representatives received a straight salary,
no commissions, and were warned not to oversell. The most important tools for
gauging success and ascending the corporate ladder were achieving the maximum
efficiency and getting the right numbers in the “green book,” the company’s
internal productivity report.
“Don’t
make waves, not even ripples, is the norm,” one assistant vice president told
Steven P. Feldman, who spent a year inside a Bell operating company for his
1986 doctoral dissertation. “We wait until it is close to unanimous before we
make a decision. Sometimes it takes 10,000 Bell managers to make one half a
decision.”
Dr.
Feldman, now an associate professor of management policy at the Weatherhead
School of Management at Case Western Reserve University, remembers Ma Bell as a
“tight culture of conformity, where you had to fit in and please your boss.”
Indeed, another assistant vice president told him, “I never tell my
subordinates I don’t like beards or nonwhite shirts, but I tell tem they never
see me with a beard or a nonwhite shirt.”
This
culture of control created managers who were averse to risk and who could,
should a risky venture like the 1969 Picturephone fail, pass the charges on to
the customer. Nor were they required to anticipate or accommodate customer
demand, because they could never lose it. Until 1959, AT&T didn’t even have
a marketing department. Of course, other big companies had similar
characteristics, but only AT&T had no competition.
Indeed,
one reason why Mr. Armstrong says he’s breaking the company into four pieces is
to spark the innovation and entrepreneurial focus that has been lacking at
AT&T. In his remarks yesterday, Mr. Armstrong said each of the four new
AT&T’s “will move faster in meeting customers needs” and that employees
“will be even more highly motivated because they’ll be working for
industry-leading companies that don’t have to compete internally for capital or
attention.”
When
the tide began to turn against the Bell monopoly in the 1960s and 1970s, the
company was psychologically unprepared for the competition that was swarming
into its industry. The company had begun to lose energy and put on weight. Its
managers were experts at efficient operations, not futuristic visionaries, and
the hierarchy was becoming as fixed as the steel and cement of an old plant. AT&T’s
cash cow, long-distance telephone service, demanded so much attention a- and
paid so handsomely – that management had little appetite or incentive for
innovation.
As
the 1980s loomed, demand for telecommunications was expanding too rapidly and
becoming too complex to be served by the Bell System alone. People, especially
in business, wanted more than voice transmission from their wires: They wanted
to move and process data at high speed, too. With the development of electronic
switching stations, microwave transmission and satellite communications, the
technological justification for AT&T’s monopoly disappeared. Because there
were now other ways to provide communications services, AT&T’s lock on the
market no longer made sense. Even then, AT&T fought to preserve its
monopoly by using regulation as a competitive ploy, stalling decisions that
might help competitors.
Then
in 1984 came divesture, when AT&T’s much vaunted vertical integration was
gutted by the Dept. of Justice, the company which until then had controlled
both the local and long distance markets had to choose whether it wanted to be
a Baby Bell.
A
government official who was involved in the 1996 telecommunications act says
AT&T may have “made the wrong call.” When it was a local phone company, AT&T
had reached almost every consumer in America with it s wires and bills. That
alone gave the company clout with politicians, some of whose constituents also
worked for AT&T in their home states. After divesture, the ability to reach
the individual customer, as well as more than half a million employees belonged
to the regional companies.
Some
government officials in Washington D.C. became more protective of the baby
Bells in their home states. During negotiations over the Telecommunication Act
of 1996 the Baby Bells wielded their political might with members of Congress
who were writing and voting on the bill. While AT&T lobbied hard for some
concessions, the law was largely viewed as a win for the Bells and sure enough,
they went on to become the foundation of some of the strategic best-positioned
telecommunications giants of the 21st century, Verizon
communications, SBC Communications, Qwest Communications International and Bell
South Corporation.
After
1984, AT&T suddenly found itself trying to operate in a world utterly
foreign to its experience. The company had picked off hungry competitors in the
early Twentieth Century was being picked apart by savage competition. Like any
mature company trying to compete in a booming market. AT&T either had to
transform itself or die. Its new goal: offering one-stop shopping to
telecommunications customer.
In
the past 15 years AT&T has had to tackle three enormous obstacles to that
goal
1)
keeping
up with new technology
2)
reinvesting
itself as a competitive player rather than a monopoly and
3)
retooling
its rigidly bureaucratic management.
The
company has made extraordinary strides in all three areas.
But
in 1996, the Telecommunications Act gave the Baby Bells and other competitors
the right to compete in long-distance service, ant AT&T suddenly found its
lock on the long-distance market at risk. New entrants with lower prices and
state-of-the-art service and technology were nibbling at AT&T’s
bread-and-butter business. And the Bells-with their millions of captive consumers
– were eager to break into the lucrative long-distance business.
AT&T
could have tried to build its own network to match the Bells’ facilities, but
decided against it. “The day after the telecom act was passed, AT&T should
have announced a massive capital investment to build a local network,” says
Brian Adamik, an analyst with Yankee Group who has tracked AT&T for 20
years.
Instead
of spending the $200 billion to $300 billion such a network would have cost,
AT&T tried instead to negotiate agreements with the Bells to lease parts of
their networks and resell the Bells’ phone service. Even if it could hammer out
such agreements, however, the fees AT&T would have to pay made the
company’s prices less competitive. Realizing the economics were against them,
AT&T set out to find other ways of reaching “the last mile” into people’s
homes that it had ceded to the Baby Bells – first with fixed wireless
technology and then cable television.
Fixed
wireless has shown promise, though the company has been painfully slow in
rolling it out. Its cable acquisition campaign has been aggressive, making it
the country’s biggest cable provider, with lies passing 26 million homes. But
its purchases give it “a Swiss cheese footprint throughout the U.S.,” says Mr.
Adamik.
Meanwhile,
the company has jumped with both feet into competition for other alliances,
mergers and acquisitions. It has tried, not always successfully, to form
partnerships with companies such as Time Warner Inc. and American Online Inc.
It acquired a leader in the wireless business, McCaw Cellular communications
Inc., as well as two big players int eh cable industry, Tele-communications
Inc. and MediaOne Group. In 1997, it brought in the first outsider ever to lead
AT&T, Mr. Armstrong, a former IBM executive who had just given the aging
defense contractor Hughes Electronics Corp. a new lease on life in satellite
communications.
“They
do seem to lurch from one thing to another,” says Peter Temin, a professor of
economics at the Massachusetts Institute of Technology and author of “The Fall
of the Bell System.” “But the problem for a company with such a large installed
base is that it’s hard to make a new move because you’re afraid of disturbing
your current cash cow.”
Whether
the cause was fear or misfortune, the past 15 years have also seen costly
mistakes and missed opportunities. In its hurry to enter the personal-computer
business, AT&T mounted a hostile takeover for NCR Corp. in 1991, paying
$7.4 billion for the company. The two companies never meshed, and NCR quickly
began losing customers and managers. After pumping a further $2.8 billion into
the beleaguered business, AT&T finally spun off NCR in early 1997, just a
few months after AT&T’s equipment business became independent as Lucent
Technologies Inc.
Good morning and every good wish for a
great spring. Some of your papers have
been turned back and the rest will be graded in the next couple of weeks.
Ted Mooney said to me after the class
that he felt good about the reaction from the students and about his
presentation. Ted also said Tom Usher
had cancer and cancelled his golf game with him next week and asked if he was
coming to our class. I said as far as I
knew he was coming—I heard nothing to the contrary, but I will call his office
today. Soon as we get out of this
class—coming or not coming---we will have the US Steel team make their
presentation. I will e-mail you tomorrow
if Tom Usher is not coming!
Lets talk this morning about
AT&T. Refer to the syllabus—Two
Tricky Strategies can MCI & AT&T win.
Alexander Graham Bell invented the
telephone in 1876. (Though Mr. Bell had
just a few hours before filing the paperwork for his patent in 1876.) Western Union’s Elisha Gray would be
celebrated today and telecommunications history would be a lot different.
The real accolade at AT&T’s
success however, was Theodore Vail who built the Bell System and turned a
market Strategy into a lasting corporate ideology.
In the 1880’s, Vail merged a hundred of
local exchanges into the Bell System and fought off Western Union with a
“patent infringement suit” and worked tirelessly to standardize and improve
telephone technology replacing a rate most of different wires and equipment
used by local phone exchanges and making long distance calling easy.
Vail was mindful that Bells patent
would expire in 1894—the company needed to be ready for savage
competition. It came, but by then Vail
had departed to Argentina to run public utilities. Without him, the fledging AT&T struggled.
It was over-extended, service was
poor, and Bell had a pattern of buying some independents while crushing others.
The answer was a second tour of duties
for Vail, reigns fall as chief executive in 1907 after a banking group led by
JP Morgan gained control of AT&T.
By the time he returned in 1919, Vail
had led AT&T to local phone and long distance dominance, turned its Western
Electric manufacturing into an equipment monopoly and created a culture that’s
kept him not only standardizing but also tireless research and technological
research and innovation. All to keep
the roof from the door and the company’s legendary R&D.
Mr. Vail made peace with federal and
with 1913’s Kingsbury Commitment to which AT&T agreed to divest itself of Western
Union and its telegraph operations, accepted limits on the acquisitions it
could make and agreed to connect up independents.
But trouble with the federal
government would never go away for long.
In 1940, a new antitrust suit was filed against AT&T demanding it
sell Western Electric. That suit was
dropped in 1956 in exchange for AT&T’s promise to stay out of the business,
but in the late 60’s ruling by the Federal Communication Commission set the stage
for a successful antitrust case in 1968.
The FCC ruled that other companies could hook their equipment a year
later to the network.
The FCC ruled that the Microwave
Communication Inc, later known as MCL could join the microwave-radio service to
the Bell System.
In 1974 both MCI and the federal government
sued AT&T on antitrust grounds. But
their Ma Bell image had changed.
Customers were tired of its imperious service and each cluster of
products and other companies were pressing it to open local and long distance
markets in competitors.
Bell Labs remained a matchless R&D
shop. It invented UNIX in 1969-but its
parent company that became a stodgy bureaucracy that believed nothing useful
could ever be invented outside its door.
In 1982, AT&T surrendered—bloodied
by the Justice Dept’s determined pursuit of its antitrust case, political
fallout from a bare knuckle lobbying campaign in Congress and a court decision
avoiding MCI $1.8 billion in damage (slashed to $113 million in a retreat.)
The company agreed to a monumental
breakup. Twenty-two local phone
companies were replaced into seven baby bells with AT&T keeping its long
distance business and Bell Labs, the telecom equipment business and gaining the
right to get back into the computer business.
The new AT&T was born the first
day of 1984 but it found itself in trouble—long distance remained strong but
the re-born computer business was also suffering and the company continued to
market its products like a king dispensing favors.
Building a new corporate culture and a
new AT&T fell to Robert Allen—who had been key in drafting the blueprint
for a post breakup of AT&T.
Starting in 1988—Allen slashed jobs
and costs, divided the company into new business units to which considerable
authority was given, replaced the old guard with younger managers and even
pushed Bell Labs to bring more products to market.
Allen vision was a company that would
join telecommunications and computers into a worldwide power with
AT&T. Powered by AT&T gear
carrying calls and data for consumers and businesses using AT&T computers
and software. Allen was determined to
acquire what AT&T couldn’t produce with its own computer business
struggling the company spent $7.5 billion in a hostile takeover of computer
maker NCE.
Allen’s vision was breathtaking. It also never worked. The NCR deal was a disaster. AT&T growth was slow and Morale was
demolished by restructuring.
In 1995 Allen orchestrating another
breakup of the company. This was
voluntary but no less monumental.
AT&T’s long distance and cellular
operations (fruits of $11.5 billion deal with McCaw Cellular Communications)
spin off its computer unit and combined its equipment arm and Bell Labs into
another spin off, Lucent Technologies.
That left AT&T focused on its long
distance business and gearing up to reenter the local arena in competition with
the Baby Bells it spawned off.
In
January 1998 AT&T spent $11.3 billion to acquire Teleport Communications
Group—a small Bell, but it had another strategy for chasing the local phone
market and this one’s potentially huge.
Management
495/579
April
20, 2000
Thanks for your continued interest in our class.
Let me congratulate you both on your last research and 30 minute
presentation of Nordstrom and the Chicago Mercantile Exchange. You went and visited their locations and
that really showed.
Scott Gordon remarked that every time he
comes to the class he learns something about the Merc and most of the senior
managers do not know the detail of the Merc that the team did.
Show Chart on Leadership
Bob
Middlemas Scott
Gordon
Ex.
Vice President Chairman
Very
aggressive Mathematics
Assertive Psychology
Smart Hard
work
Knows
the retail business People skills
Grew
up in Washington Hard work
21st Century
What are going to be the conditions that you will spend most
of your professional life working/coping with?
Economy
Don’t expect “volatility” to go away, but as the 90’s come to
a close, all the elements are in place for an era of long term growth.
Economies, like living organisims, always evolve in response
to challenges and opportunities. The
changes can be drastic.
Only 10 years ago, Japan was triumphant and the US was slow
growth and a hobbled banking system.
But today’s statistics tell a very different story. By virtually every measure, the 1990’s have
turned out to be a decade of unexpected prosperity for the US, what has been
called the “New Economy.”
The numbers are impressive:
a 70% increase in real profits since 1990 inflation below 2% - 4.5%
unemployment plus rising wages, even for the lowest priced worker.
What
Next?
Findings - The 90’s are no
fluke! Despite Asia’s woes, all the
ingredients are in place for a surge of innovation that could rival any in
history.
Call it the 21st Century economy, driven by technological
progress, can grow at a 3% pace for years to come. The information pipeline is fuller than it has been in
decades. With the advent of the
Internet, the information revolution seems to be spreading and accelerating,
rather than slowing down.
What’s more, the US economy seems to be undergoing a
“wholesale rejuvination.” Business,
financial service firms and university are reinventing themselves.
To be sure, the path from the new economy to the 21st century
economy will likely be a bumpy one.
Each innovation surge creates economic and social ills, from recession
to stock market crashes to wide-spread job loss. e.g. Exxon acquiring
Mobil Oil - 10,000 jobs lost. But
that’s the price a nation must pay to achieve the benefits of dynamic changes.
Big Picture
Innovations - Great Leap
Recessions - Still with us
With rapid progress comes
volatility
The Human Factor - The net wave How
will it work?
Coming molecular Revolution
The Century of Biology
No Slacking in the SiliconValley
Innovation - you ain’t seen
nothing yet!
We are just at the start of a powerful surge in technology
that will boost economic gain into the next century.
In our society, “mature” is a Euphenism for getting old. Consultants deride a mature market as one
without much potential. And a mature
economy as economists use the term, can no longer sustain the high growth of
younger, spryer economies.
Indeed, growth slowed down in the 70’s and 80’s - mature was
the term many economists used.
Boy, were they wrong, there is nothing old about the US
economy today. Instead there has been
an explosion of creativity and entrepreneurship that puts US competitors to
shame.
Seven years into the expansion, growth is running at a 3.5%
rate. Over the last year and despite a
small dip in the second quarter productivity is rising at a 1.9% rate.
Close:
With one stunning stroke AOL and Time Warner create a clossus
and redefine the future. On the surface
it looked like another awesome mega-merger.
There were the top executives on the stage walking around like wealthy
men assuring everyone that this would be a merger of equals. A careful blending of two equal companies
and two cultures. But, make no mistake,
AOL bought Time Warner. AOL is the
acquirer. The trading symbol for the
new company is AOL.
Given the realities of the “New Economy” it could hardly be
otherwise. By now, the pattern is
clear, the digital will prevail over the analog. New media will grow faster than the old and be the leader of the
New Economy.
New economy titans Stephen M. Case and Robert W. Pittman will
team up with the old economy strategist Gerald L. Levin to assemble a new kind
of conglomerate whose existence will likely change the contours of information
and entertainment media.
Case will be chairman of AOL Time Warner in a bid to define
the future by assembling more assets and audiences and advertisers for the new
digital marketplace than anyone has previously thought of.
The merger was an immensely costly move: to secure this
strategic stronghold, AOL proposed to pay a 71% premium over what Time Warner
was valued at in the market. AOL’s high
flying stock was quickly devalued as investors focused on how tying up with
Time Warner may produce a company with high rates of return usually associated
with the old economy. Old Economy
management culture could rob 15-year-old AOL of the flexibility, speed, and
entrepreneurial drive that are crucial in the New Economy.
Finally after getting back from Spring Break and a
Mid-term the first day that we returned from our Spring Break. We gave a
mid-term Exam and finally we have a Power Shortage – that we have to excuse you
from this exam and take it home and return it the next day before noon 12:00
pm. So the last week I visited Abbott, and Nalco and ServiceMaster. Let me tell
you a true story about the morning I visited Nalco, in Naperville. I had been
visiting Nalco for a number of years and visited Nalco on Buttefield Rd in Oak
Park.
When H. Clark was the Chairman and CEO. Stephen Newlin is now the President and Chief Operating Office, and the reason I could not find Nalco just night before. Thursday night the sun went up and it said ONACA and I saw the sign but the place look familiar, but I did not see the Nalco underneath it. So I was about 15 minutes late. You need to go out there if you are part of Nalco team, and the same is true of the people who are part of the ServiceMaster team. As you plan to go out the ServiceMaster they have an annual report it will be passed out, later this period. Show ServiceMaster annual report for 2000. Notice John Wad is President and CEO.
Discuss the sheet that you time in on each member – show sheet. No one spend exactly the same amount of times on these. I take this sheet very seriously marked accurately I do not believe every one should have a 5 and exact hours have for everyone. Show Siemens, Baxter and S & C Electric Co.
Armstrong’s
Last Stand!
In November, during a course she teaches at Northwestern University Graduate School of Management, Oprah Winfrey delved into a pocket of fear for the famous talk show host.
She talked about her own trepidation in trying to teach a graduate course. Then she turned for more insight to be her special guest for the class, none other than Michael Armstrong, Chairman and CEO of AT&T. “What I tried to show her Northwestern students is that fear is a part of life,” he says. “To deny fear will really help you from dealing with fear.”
Armstrong ought to know, given the scary state of
AT&T. The company’s core long distance is melting like a chocolate bar on a
hot dashboard. Revenue for the business, which amounted to ½ (50%) of
AT&T’s $67 Billion in sales, tumbled about 11% last year to $34 Billion.
The pace of decline is expected to accelerate to 17.5% this year, 2001,
according to J.P. Morgan Chase.
Armstrong’s efforts to buy his way out of the mess by
acquiring cable giants Tele-Communications, Inc. and Media One Group have
saddled the company (AT&T) with an alarming $62 Billion debt. And selling
new innovative high speed internet access and local telephone over the cable
television network are still to small to pick up the slack.
In a desperate attempt to rescue AT&T, Armstrong
announced on October 25, 2000 that he would break the 123-year-old flagship of
the American telecom industry into four pieces. Armstrong argued that the
restructuring would unlock shareholder value because the growth of the wireless
and cable business won’t be obscured by the declining long distance business.
But investors and analysts balked! The company’s
stock was wacked 13%, falling to $23 ½ the day the restructuring was announced
and it ended 2000 year down 66% at $17 ¼ though it has recovered
somewhat since then. You should look at the current AT&T stock price.
“I think the plan is completely flawed,” says Robert
Gensler, manager of T. Rowe Price Associates, Inc., Media &
Telecommunications Funds.
If that wasn’t bad enough, the plan has sparked a
mutiny inside AT&T. The communication workers of America and other unions,
which represent 35,000 of the company’s 165,000 workers, are fighting tooth and
nail to block the break up, worried that it will cost the members jobs. They’re
trying to persuade AT&T shareholders to vote
|
Mike
Armstrong's Last Stand |
|
Can
AT&T's CEO untangle the telecom's assets and reconnect with investors?
Here's an inside look at his strategy -- and its prospects |
In
November, during a course she teaches at Northwestern University's Kellogg
Graduate School of Management in Evanston, Ill., Oprah Winfrey delved into the
topic of fear the way only the famous talk-show host can: She talked about her
own trepidation in trying to teach a graduate course. Then she turned for more
insight to her special guest for the class—none other than C. Michael
Armstrong, chairman and CEO of AT&T. "What I tried to share with the
students is that fear is part of life," he says. "To deny fear will
really keep you from dealing with fear."
Armstrong ought to know, given the scary state of AT&T (T). The company's core
long-distance business is melting like a chocolate bar on a hot dashboard.
Revenues for the business, which accounts for about half of AT&T's $67
billion in sales, tumbled about 11% last year, to $34 billion. The pace of
decline is expected to accelerate to 17.5% this year, according to J.P. Morgan
Chase. Armstrong's efforts to buy his way out of the mess by acquiring cable
giants’ Tele-Communications Inc. and Media One Group have saddled the company
with an alarming $62 billion in debt. And new initiatives, such as selling
high-speed Internet access and local telephone service over the
cable-television network, are still too small to pick up the slack.
In a desperate attempt to rescue AT&T, Armstrong announced on Oct. 25 that
he would break the 123-year-old flagship of the American telecom industry into
four pieces. Armstrong argued that the restructuring would unlock shareholder
value because the growth of the wireless and cable businesses won't be obscured
by the declining long-distance business. But investors and analysts balked. The
company's stock was whacked 13%, falling to 23 3/8 the day the restructuring
was announced. And it ended 2000 down 66%, at 17 1/4, though it has recovered
somewhat since then. "I think the plan is completely flawed," says
Rob Gensler, manager of T. Rowe Price Associates Inc.'s Media &
Telecommunications Fund.
If that wasn't bad enough, the plan has sparked a mutiny inside AT&T. The Communications
Workers of America (CWA) and other unions, which represent about 35,000 of the
company's 165,000 workers, are fighting tooth and nail to block the breakup.
Worried that it will cost their members jobs, they're trying to persuade
AT&T shareholders to vote against the restructuring. Union leaders even
recruited New York State Comptroller H. Carl McCall, an ambitious politico
who's considering a run for governor, to lure Armstrong to a meeting of
institutional investors in December. Only the night before did Armstrong
discover that the attendees were managers of union pension funds -- and largely
hostile to his plan. "He sandbagged me," Armstrong said after the
meeting, according to one insider.
IT'S
PERSONAL.
Now, Armstrong is making his last stand. Under attack from all sides, the
fiercely proud 62-year-old in the twilight of his career needs to pull off one
of the most complex and controversial restructurings ever. At stake is the
future of AT&T -- and his own reputation. Armstrong was widely considered
one of Corporate America's best and brightest when he landed at the telephone
giant in 1997 after a sparkling career at IBM and Hughes Electronics Corp. But
his ambitious attempt to restore Ma Bell to her former glory by making it the
most important communications company of the Digital Age lies in tatters. If he
can't make the breakup a success, he risks being remembered as the man who
oversaw the demise of an American icon.
No question, Armstrong's struggle to remake the telephone giant is personal. He
has been working 18 hours a day, spending his weekdays on AT&T's operations
and his nights and weekends on the breakup. In between, he has crisscrossed the
country, wooing investors, customers, and employees. He sees his family less
and doesn't have time for the long Harley rides he once enjoyed. He even
brought in a new president, David Dorman, previously CEO of the Concert joint
venture between AT&T and British Telecommunications PLC, to run the core
telephone business while he takes charge of the committee that is overseeing
the restructuring. "Hopefully, that will give me some of my life
back," he says. All the while, he exudes optimism. "For the next
decade, several AT&T’s will prosper and grow and create value for share
owners, whereas just three years ago, that was very uncertain."
For now, however, Armstrong is waging a grueling, inch-by-inch struggle to pull
the company out of its morass. Interviews with more than a dozen AT&T
insiders and 30 outsiders show that Armstrong is making progress in creating
more valuable enterprises out of the wreckage that AT&T had become.
Corporate customers, such as bookseller Barnes & Noble Inc., say the CEO's
personal appeals have helped persuade them to stick with AT&T. Armstrong
has raised billions of dollars to finance the company during its transition.
And he has made progress in shoring up morale, with both pep talks and cash. In
a development not yet made public, Armstrong persuaded his board to issue a
special batch of new options for as many as 56,000 eligible employees.
What's more, AT&T's operations are providing some cause for hope. AT&T
Wireless Group is expected to report a 35% rise in revenues last year, to $10.4
billion, about seven percentage points more than the industry's average growth.
The cable-TV unit, called AT&T Broadband because it also offers high-speed
Net connections, is expected to post revenue growth of 10.4% for 2000, slightly
ahead of the cable-industry average of 8.9%.
J.P. Morgan Chase telecom analyst Marc B. Crossman estimates that with the
tailwind of selling Internet access and cable telephony, the unit's revenue
growth will accelerate to 16% this year. And Business Week has learned
that significant cost cuts are planned to boost the unit's profitability.
AT&T Broadband could eliminate up to 2,000 positions, out of 53,000, over
the next 12 months, people familiar with the matter say. Some of those workers
will be reassigned to faster-growing markets.
STRONG BUY. Investors are
beginning to take notice. On Jan. 9, analyst Simon Flannery of Morgan Stanley
Dean Witter, who has long been bearish on the company, reversed course by
upgrading the stock to a strong buy from neutral. The breakup should be a
"catalyst for out performance over the next several months," he wrote
in a research report. Since the beginning of 2001, AT&T's stock has climbed
35%, to 23. The rise, in part, came as experts realized the deterioration of
the long-distance business was an industry-wide phenomenon brought on by
increased competition—not just an AT&T problem. And a similar restructuring
at rival WorldCom helped to further vindicate AT&T's strategy, says
Armstrong.
Not that it's time for Armstrong to take a victory lap. AT&T's stock is
only back to where it was when the restructuring was announced. And Business
Week has learned that the company has run into substantial trouble in
developing new cable-telephony equipment. The result is that the cost of
signing up customers for local telephone service over the cable network will
continue to be $600 per home for another year or two instead of dropping to
$400 per home in 2001, as Armstrong had promised investors. AT&T confirmed
the delay.
Meantime, the long-distance business continues to cast a pall over the rest of
the company. Consider this: Long-distance revenues are expected to shrink by $6
billion this year, to about $28 billion, Crossman says. That means other lines
of business would need to grow nearly 20% just to keep AT&T's total
revenues even at $67 billion.
The two units that provide long distance have problems beyond evaporating
revenues. AT&T Business, which gets more than half of its $29 billion in
sales from long distance, lost corporate customers in late 1999 because of a
chaotic sales-force reorganization. Insiders also say that Rick Roscitt, the
unit's fourth president in three and a half years, may leave soon for another
job. And AT&T Consumer, with 95% of its $19 billion in revenues coming from
long distance, may need a cash infusion in the next two or three years just to
survive. It's being loaded up with $9.5 billion in debt as part of the split,
and its cash flow may not last the seven years necessary to pay that off,
analysts say.
Armstrong believes only the strong medicine of a breakup can fix things. By
busting up the company, he will make employees more responsible for the
performance of their own businesses, force the four unit chiefs to slash costs,
and enable investors to value each piece of the business on its own merits.
That should boost the stock price because many investors want equity in one
piece of the company but not the entire AT&T. If the four new businesses
receive market valuations on par with those of comparable companies, says
Crossman, AT&T's stock should rise 50% more, to the mid-30s, within the
next 12 months. "If you buy the stock now, will you make money?
Absolutely," says Crossman. "Long distance is melting down, but the
outlook for the rest of the businesses isn't bad."
To understand why AT&T's prospects are changing, look at how Armstrong has
spent the past 90 days. He has set an exhausting pace, trying to convince
investors, bankers, customers, and employees that his plan is a winner. He has
called the CEOs of insurance giant MetLife Inc. and hotel company Cendant to
help close big contracts. He has cracked the whip like never before, weeding
out the bottom 10% of the 8,000-person sales force at AT&T Business.
"We're playing to win," he says.
The tale of how Armstrong started down this path begins further back than most
would suspect. It was in November 1999, that he first considered busting up the
company. He was trying to persuade his close friend and confidant Charles H.
Noski to join him at AT&T. Daniel E. Somers, the chief financial officer at
the time, was moving over to head the cable business, and Armstrong needed a
CFO who would carry weight on Wall Street. Noski, then president of Hughes, met
Armstrong for breakfast at the Hyatt Regency Greenwich in Connecticut. Noski
remembers the meeting well -- Armstrong had waffles, and he had eggs.
FIRST
INKLING.
Armstrong had spent the previous two years trying to rebuild AT&T into a
juggernaut that could supply soup-to-nuts communications services. His $105
billion in cable acquisitions were designed to allow him to sell consumers’
high-speed Net access and local telephone service over the cable-television
network, along with AT&T's existing long-distance, wireless, and data
services for corporations.
But at their breakfast, Noski questioned whether AT&T might benefit from
the sort of restructuring the pair had done at Hughes, where they created a
tracking stock to separate Hughes from General Motors Corp.'s car business. Was
AT&T getting credit in the stock market for each business, Noski wondered?
Did they all have to be part of the same company? Armstrong agreed that if
investors didn't recognize the value of each business, a change might be
necessary. "We challenged the theory that everything needed to be under
one roof," says Noski.
By the summer of 2000, the old theory was creaking under the strain. Consumer
long distance, which Armstrong thought would shrink 5% last year, was crashing
at an 11% rate. Investors pummeled AT&T's stock, which fell from 61 in
March to 31 in June. At the same time, Armstrong and Noski, who became CFO in
January, had been researching how much the different AT&T businesses relied
on each other. The answer? Not much.
They estimated that less than 15% of AT&T's revenues came from cross
selling between two business units. That approach "is not anything that
either keeps customers or gets customers," says Armstrong. Over the
summer, Armstrong worked out the details of the four-way breakup. By the time
the company's two-and-a-half day management retreat began on Sept. 23 at
AT&T headquarters in Basking Ridge, N.J., the restructuring was a working
plan. The ever-optimistic Armstrong dubbed it "Grand Slam," and
AT&T’s board of directors unanimously approved it on Oct. 23.
Two days later, Armstrong did his best to sell the idea to the public. A car
whisked him from his home in Connecticut to the Sheraton New York Hotel and
Towers in Manhattan by 6:15 a.m. He began his pitch with a series of TV
interviews and continued schmoozing with Wall Street analysts, investors, and
others until 11 p.m. His central point was that AT&T was splitting into
four pieces because the troubles in long distance were overshadowing the strong
growth in other areas, such as wireless and Net services. He insisted the
breakup wasn't a change in strategy: People may have thought that Armstrong intended
to bundle together every communications service under the sun, but he says he
really only intended to bundle services such as cable television and
cable-modem Internet access that used the same network. Companies with
different networks could strike marketing agreements to provide broader bundles
to consumers and businesses. "I see the restructuring as a sign of
accomplishment because it means these companies are ready for public
investment," he maintains.
NAYSAYERS. Still, Grand Slam was
a strikeout. Many investors felt Armstrong was conceding that his acquisition
spree was a bust. "Clearly, this is a complete reversal of strategy,"
says telecom analyst Adam Quinton of Merrill Lynch & Co.
Armstrong was crushed. The next morning, on his way to Basking Ridge, he got
his first look at the morning's headlines. The Wall Street Journal said
AT&T needed "a little less vision and a lot more focus." The New
York Times carped: "If only AT&T worked as hard at
telecommunications engineering as it does at financial engineering, maybe
investors would treat it with more respect." Armstrong says it was one of
the lowest points in his career: "It was a huge disappointment."
There was no time to wallow in misery, though. AT&T needed a lot of cash to
make it through the restructuring. Noski figured they had to raise $25 billion
over the next few months. It wasn't the best time to launch the second-largest
short-term debt offering in history. Currency officials in Europe were
concerned about bank exposure to highly leveraged telecom companies. And
AT&T no longer had the pristine balance sheet it once did.
Still, on Oct. 26, Armstrong and Noski met with bankers at AT&T's former
headquarters in lower Manhattan. The pair sat on one side of the table in the
Art Deco boardroom, while reps from Chase Manhattan, Merrill Lynch, Goldman
Sachs, and Credit Suisse First Boston faced them. It was Armstrong who led the
pitch, like the hard-charging football star he used to be. He argued that
AT&T's debts were reasonable because it planned to sell assets, such as its
$4 billion in Microsoft and Comcast stock. Reassured, the four banks agreed to
put up $2.5 billion each, for a total of $10 billion.
Winning the support of equity investors was another matter. On Oct. 31, after
the stock had slid even further, to 22, Armstrong boarded a company jet to talk
to shareholders on the West Coast. The following morning, he met Jeffrey E.
Heil, who oversees $55 billion worth of investments for the Regents of the
University of California, for a 7:30 a.m. breakfast at the Mandarin Oriental
Hotel in San Francisco. Heil held 24 million shares of AT&T and had the
power to buy more, but he was worried that the breakup would hinder cooperation
among the various businesses. "I can't see how the marketing agreements
between the companies will last more than a year or two," he says.
Armstrong assured him that AT&T Business, for example, would still be able
to buy service from Wireless and Broadband. But he didn't sway Heil. "His
response was a little pie in the sky," Heil says. Armstrong concedes,
"I didn't feel I had connected."
Heil was hardly the only dissenter. Brian Hayward, manager of the $2.4 billion
Invesco Telecommunications Fund, sold his remaining shares in AT&T after
Armstrong announced Grand Slam. Even when Armstrong gave a speech in New York
in November to persuade money managers that his strategy was sound, Hayward
wasn't convinced. "They've been telling us up until now that bundled
service is the way of the industry, and now they're telling us these companies
are ready to be broken apart," he says. "It insulted my
intelligence."
Fortunately for Armstrong, customers were more receptive. On Nov. 6, Armstrong
and Kenneth E. Sichau, president of sales at AT&T Business, met for
breakfast with one important client, Barnes & Noble Chief Information
Officer Joseph Giamelli. AT&T had stumbled in delivering high-speed Net
access to the bookseller two years earlier, and Giamelli was worried that the
breakup could trigger another episode of poor service. Armstrong and Sichau
reassured him that the restructuring wouldn’t distract the sales force. "I
left with enough confidence to say I think they will deliver on their
promise," says Giamelli.
One of the thorniest issues of the restructuring was how to resolve differences
among the four new businesses. On Nov. 7, Election Day, one such dispute was on
the table. Early that morning, a group of AT&T execs rose early to vote,
and then boarded a company plane for Seattle. Wireless chief John D. Zeglis was
upset because the AT&T Business unit wanted exclusive rights to use the
AT&T brand in marketing to corporations. But Wireless wanted to use the
brand to sell its high-speed data services to companies. Armstrong didn't think
two units should use the brand in the same market, fearing it might alienate
customers.
There was much at stake: AT&T's 100-year-old brand is one of the most
recognized in the world, and using it would be a boon for a new company such as
Wireless or Broadband. Conversely, the loser in the battle would be forced to
spend millions of dollars building consumer awareness. Execs from both sides
met in Redmond, Wash., and tried to hammer out their differences from 1 p.m. to
8 p.m. As the TV in the conference room blared that Vice-President Al Gore had
won Florida, Zeglis and the lawyers spent a half-hour debating the meaning of
the phrase "change of [brand] control." Their discussion seemed no
more conclusive than the Election Night returns. With Armstrong's blessing,
they agreed that Wireless could use the AT&T brand to sell some data
services to businesses with 10 or fewer phone lines in no more than three
locations.
"A GIANT
STEP."
As November drew to a close, Armstrong got a dose of good news. AT&T
Wireless had been stymied from raising several billion dollars because of a
slump in wireless stocks and because one potential partner, Japanese
mobile-phone giant NTT DoCoMo Inc., wasn't willing to make an investment as
long as AT&T Wireless was part of AT&T. The restructuring turned the
Japanese execs around. On Nov. 30, DoCoMo agreed to invest $9.8 billion in
AT&T Wireless. With that kind of dough, Wireless will be able to rebuild
its network with new technology, expand overseas, and buy crucial radio
spectrum. "We've taken a giant step with DoCoMo," says Zeglis.
That wasn't the only reason Armstrong would have fewer money worries. One day
later, at the Pierre Hotel in New York, Noski met with bankers to find out if
he could borrow the additional $15 billion in short-term capital AT&T
needed to finance its restructuring. Reassured that asset sales would keep its
debt manageable, the bankers offered Noski $40 billion, allowing him to bargain
for the best rates.
At the same time, trouble was brewing with AT&T's unions. The caw had even
set up a Web site, www.attinsider.com that railed against the breakup. Then New
York State Comptroller McCall, who helps oversee pension funds that hold 25
million AT&T shares, asked Armstrong to speak to the Council of
Institutional Investors in New York on Dec. 12. It was an ambush: The crowd was
full of union supporters who had been given pension-fund credentials for the
day. After the meeting, McCall held a press conference where he dismissed
Armstrong's explanation of the restructuring as unsatisfactory. Armstrong was
"steaming mad" and complained that McCall had used him as a
press-conference prop for his own political gain, according to one AT&T
executive. McCall did not respond to requests for comment.
The union opposition isn't just bluster. Their most threatening argument is
that the breakup requires approval from two-thirds of AT&T's shareholders,
while management insists it requires only a simple majority. If the unions are
proved right in the courts, Armstrong may not get his plan past stockholders.
AT&T's acquisition of TCI, after all, was approved by only 72% of the voted
shares.
Undeterred, Armstrong and senior managers have been touring the country to
rally the troops. On Dec. 13, Armstrong stopped in New York to meet with about
200 employees. He had bought a cup of coffee from a lunch truck on the street
and walked into the auditorium, paper cup in hand. He tried to convey a sense
of optimism and hope. "I went in thinking he was a figurehead," says
Rich Doyle, 30, who manage the installation of phone equipment in AT&T's
own offices. "I came out grasping every pain that he feels every day about
this company."
FRESH
INCENTIVES.
Armstrong knew that words would never fully raise the spirits of employees
whose stock options were under water. So on Dec. 19, he met with the board's
compensation committee in New York and asked it to approve a plan to issue more
options. The company had issued new options back in August, when the stock was
trading at 32, but they were now worthless. So the committee agreed to issue
the new round, which is planned for February.
When the board met on Dec. 20 in New York, the pressure was growing more
intense. The board voted to cut the company’s dividend for the first times in
its history, slashing it by 83%, to 3.75¢ a share per quarter. Worse, Armstrong
was forced to lower earnings and revenue forecasts for the second time in two
months. Still, the CEO argued that there was reason for hope. The shortfall
wasn't due to the kind of sloppy execution that had plagued the company in the
past. Rather, it was because four big contracts had been delayed, and Armstrong
assured the board all four would close within the next few weeks, which they
did.
At the end of the day, the board asked Armstrong to leave the room so they
could discuss his annual performance review. In a year when such CEOs as
Richard A. McGinn of former AT&T unit Lucent Technologies Inc. have been
fired for missing earnings targets, the board could have tightened the screws
on Armstrong. Finally, after more than an hour, the directors dispatched
General Counsel James W. Cicconi to fetch Armstrong. As he entered the room,
the directors exploded with a standing ovation.
Finally, Armstrong is earning some cheers both inside and outside AT&T.
Oprah may be his biggest fan. "If he were running for President, he is one
of the few people I have ever known for whom I would quit my job and personally
campaign," she says. "He's a leader with guts, vision, and the balls
to back it up." But AT&T is a company that has been in decline for a
long time. It may be that even someone with Armstrong's talents has arrived too
late to achieve more than a modest victory.