With Breakup,
Armstrong's Bet
On Cable Is Lost
By Leslie Cauley
 
10/26/2000
The Wall Street Journal
Page B1
(Copyright (c) 2000, Dow Jones & Company, Inc.)

AT&T Corp. probably needed a little less vision and a lot more focus.

Yesterday, AT&T's chairman, C. Michael Armstrong, conceded as much. He announced that growth in the company's core phone business had fallen faster than he had anticipated. As a result, he said, instead of his original vision of a one-stop shopping telecom mecca for phone customers, AT&T will be better off split into four separate businesses "combining the power of a common vision with the focus and flexibility of separate companies."

As he spoke to analysts in New York, Mr. Armstrong put a positive spin on his latest attempt to right AT&T. "This is a pivotal event in the transformation of AT&T we began three years ago," he told them.

But nobody was buying that view this time around, especially Wall Street and AT&T's once-loyal investors. And many observers speculated that Mr. Armstrong and his lieutenants won't be around to see his latest plan completed.

"What the market said today is that Armstrong's strategy in any form whatsover -- even breaking up the company -- continues to be a failure. And the market voted with its feet" today by driving down AT&T shares, said Brian Bruce, director of global investments for PanAgora Asset Management Inc. in Boston, which has held AT&T shares.

"Today's announcement is simply window dressing" and yet another example of how Mr. Armstrong "continues to be incredibly ineffective," he said.

Back in 1997, when Mr. Armstrong had just been appointed AT&T's chairman and CEO, Wall Street considered him a hero for his visionary thinking. He had wasted no time declaring that the company's 100-year-old long-distance business -- the cash cow that was producing $8 billion in profits before taxes and interest expenses -- was all but dead. Within months, Mr. Armstrong announced plans to transform the American icon into a broadband behemoth. He snapped up $115 billion in cable-TV assets and piled up $61 billion in debt, grabbing headlines every step of the way.

The original plan for cable telephony was "a good vision. The only problem was it was too expensive and these companies that AT&T bought weren't ready to operate as telephone systems," says Nicholas Economides , an economics professor at New York University's Leonard N. Stern School of Business.

"Wall Street bought the vision of cable telephony. They didn't mind that all this money was being spent," says Mr. Economides , a telecommunications-industry expert. Unfortunately, the original projections were too optimistic. "If there is a failure [by Mr. Armstrong], it is that he didn't do things as quickly as he promised, and that's something Wall Street doesn't forgive."

In retrospect, promising a slower approach, with a little more focus on the core long-distance business, might have made some sense.

That was the approach of Louis V. Gerstner Jr. when he arrived at the top of a badly broken International Business Machines Corp. in the summer of 1993. At the time, IBM shares were down sharply, and its core mainframe business had been pronounced dead on Wall Street.

Instead of trying to woo investors with vision, Mr. Gerstner stood his ground. "The last thing IBM needs right now is a vision," Mr. Gerstner famously declared that summer. Then he devised strategies for each of IBM's businesses, including the ailing mainframe unit, and stuck to them. Mr. Gerstner turned out to be right, and today IBM is considered a turnaround success story.

To be sure, mainframes and long-distance telephone service aren't the same thing. But both were threatened by competitive new technologies, and IBM's experience raises a legitimate question about whether the long-distance business could have been saved.

AT&T's approach was less focused. Its waffling wreaked havoc on the company's share price, which hit a string of new 52-week lows this year. AT&T shares yesterday closed down 13% from a day earlier in 4 p.m. trading on the New York Stock Exchange.

It is unclear how long Mr. Armstrong will stick around once the company is carved up. So far, the board doesn't seem inclined to oust him, perhaps because it wasn't so long ago that it put him in the job. And the board approved his strategies every step of the way. While board members are "embarrassed," they are loath to remove Mr. Armstrong and start a new CEO search on top of everything else, says a person close to the board.

The outside betting, at this point, is that Mr. Armstrong won't stay for long once the restructuring is done. "Once AT&T is on a comfortable course, I suspect he'll leave and go find something else to do," says Ron Walker, a retired managing partner of Korn/Ferry International, the executive-search firm.

When asked about his role at the company, Mr. Armstrong said, "To accomplish this is going to take us some time -- through 2002." Then he continued: "One of the things I don't seem to be able to stop is growing older. I'm now 62, I will be 64 in 2002, and I never believed I should work beyond 65, so if I can orchestrate delivering the value of this in that time frame I'll feel pretty good about myself."

When asked if he would retire at 64 if the transition is complete, he said, "no," adding that he doesn't plan to stop working until he is 65.

Nonetheless, some say they wouldn't be surprised to see Mr. Armstrong bail out long before then, given AT&T's dismal performance. "A year from now, I suspect he'll be doing something different," says Scott Cleland, an analyst with Precursor Group in Washington, D.C. "He bet the farm on cable and lost a big chunk of it."

It also isn't clear whether Mr. Armstrong's handpicked lieutenants at AT&T's various divisions will keep their jobs. Dan Somers, 51, AT&T's former chief financial officer, is president of AT&T Broadband, which covers cable and Internet assets. Richard Roscitt, 48, is head of Business Services, and Robert Aquilina, 45, and Howard McNally, 47, are co-presidents of Consumer Services.

AT&T says it hasn't decided yet who will head up these divisions when they become separate companies.

One of the few AT&T executives with a secure future would seem to be AT&T board member John Zeglis, 53. Mr. Zeglis, AT&T's former longtime general counsel, was one of a few board members willing to voice concerns about Mr. Armstrong's big cable gamble a few years ago, and it now appears that many of his concerns were well founded. He is also one of the few remaining top executives to have seen AT&T through two previous breakups.

Mr. Zeglis is president of AT&T and CEO of AT&T Wireless. Under the current plan, he would continue as chairman and CEO of AT&T Wireless after it is spun off. The move stands to put Mr. Zeglis exactly where Mr. Armstrong had hoped to be right now -- heading a fast-growing company with a bright future.

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Joann Lublin and Deborah Solomon contributed to this article.

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Journal Link: See a video report of C. Michael Armstrong, AT&T's chairman and chief executive, discussing the company's restructuring, in the online Journal at WSJ.com.