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July 9, 2001 [WSJ.com]

Comcast Bid Seen As Another Setback For Armstrong's Vision



NEW YORK -- Comcast Corp.'s (CMCSA) unsolicited bid to buy AT&T Corp.'s (T) cable-television division marks the latest setback for the telephone icon's beleaguered leader, C. Michael Armstrong.

Not only does Comcast's overture, made public Monday, throw a wrench into AT&T's breakup plans, but it threatens to steal away the division that Armstrong reportedly wants to run once the restructuring is completed.

"This is a big no confidence vote on AT&T's cable strategy" and Armstrong's tenure, said Scott Cleland, chief executive of the Precursor Group, an independent research firm in Washington.

Fresh from a successful stint at Hughes Electronics, the outgoing and confident Armstrong enjoyed a hero's welcome when he took over the helm of a wilting AT&T in November 1997 and proclaimed he would transform the century old long-distance giant into a broadband behemoth.

But the luster on Armstrong's star has faded in the last two years as his gamble to acquire cable-TV companies and provide a bundled voice, data and Internet services over cable lines proved too costly for AT&T's shrinking long-distance business.

AT&T shares, among the most widely held in the U.S., have declined 22% since Armstrong took the reins, compared with a gain of 22% for the broader stock market, as measured by the S&P 500 Index.

"The failure of his strategy has been apparent through the incredible stock-price drop that has been occurring," said Brian Bruce, director of global investments for PanAgora Asset Management in Boston, which owns AT&T shares.

Comcast's $58 billion bid for AT&T Broadband, which values the unit at half what Armstrong spent to build it, "cements the fact that he overextended himself," Bruce said.

Now Armstrong finds himself facing some of the same criticisms lobbed at Robert Allen, his predecessor at AT&T. Allen's muddled strategy, which included the spin-off of its profitable equipment-making unit, Lucent Technologies Inc. (LU), and a foray into the computer-making business, were blamed for Ma Bell's earlier woes.

Armstrong's tenure at AT&T has been marred by shifting strategies -- first spending too heavily to make acquisitions then moving too late to spin off units and breakup the company -- and an inability to execute on those plans, his critics say.

Hoping to reduce its reliance on the shrinking long-distance business, Armstrong paid $115 billion and assumed $61 billion in debt to become the largest cable operator in the U.S. But upgrading those networks to provide bundled services prove more costly and challenging than anticipated and AT&T's financial results deteriorated.

"Armstrong bet the farm on the cable convergence strategy and it turned out to be a very bad bet to the tune of tens of billions of dollars of shareholder value," said Cleland.

In a bid to retire some of the debt assumed in the cable acquisitions and boost shareholder value, Armstrong spun off the fast-growing wireless division, AT&T Wireless Group (AWE), and later unveiled plans for a bold breakup of the company into four parts.

Armstrong was chairman and CEO of Hughes Electronics for four years before taking the reins of AT&T. At Hughes, he succeeded in spinning off the shrinking defense business and made it a leader in the burgeoning satellite television business.

And some are supportive of his efforts to revive AT&T. They say Armstrong's vision for bundled services, though costly near-term, is the right long-term move and Comcast's hostile bid confirms that Wall Street failed to recognize the value of the different parts of AT&T.

"In some sense getting a high bid for pieces of the company, such as today is vindication to Armstrong" and his breakup plan, said Nicholas Economedies, an economics professor at New York University's Stern School of Business. "It shows the company is worth more in pieces than together."

Then again, Armstrong was the one who brought the pieces together in the first place.

-Marcelo Prince, Dow Jones Newswires, 201-938-5244

Briefing Book for: CMCSA | CMCSK | T

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