End of the Line

End of the Line

by Leslie Cauley


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For more than a century, the American Telephone & Telegraph Co. was a towering fixture in the American business landscape. At the forefront of the global communications revolution, AT&T led the way in the development of the telephone, wireless communication, and the Internet. But at the end of the twentieth century, with one man floundering at the helm, the corporate giant collapsed. It was the end of an era.

Veteran telecom journalist Leslie Cauley pursued the story for over a decade and witnessed the entire debacle. At The Wall Street Journal and at USA Today, she has earned a reputation for aggressive investigation of the numerous industry shake-ups -- none more dramatic than AT&T's headlong plunge as it misguidedly attempted to become a broadband leader. Cauley gained access to current and former AT&T executives, boardmembers, and other insiders. Filled with new and controversial material and peopled by a cast of characters worthy of a Shakespearean drama, this is the first book to chronicle this riveting tale.

Up through the late 1990s, AT&T -- tough, innovative, resourceful -- seemed infallible. For industry insiders and for the general public, it loomed as an emblem of American business prowess and, even more, of the American Dream fulfilled. End of the Line is an unprecedented account of the ruin of an icon and one of the shattering corporate events of our time.

Product Details

ISBN-13: 9781439123096
Publisher: Free Press
Publication date: 07/28/2008
Pages: 320
Product dimensions: 6.00(w) x 9.00(h) x 0.90(d)

About the Author

Leslie Cauley is a telecom writer for USA Today. She has been a business journalist for more than twenty years, spending nine years as a staff writer and editor for The Wall Street Journal in New York. Over the course of her career, Ms. Cauley has been nominated for the Pulitzer Prize three times. She lives in Manhattan.

Read an Excerpt

End of the Line

The Rise and Fall of AT&T
By Leslie Cauley

Free Press

Copyright © 2005 Leslie Cauley
All right reserved.

ISBN: 0743250257

End of the Line

John Malone had a bad feeling.

The cable titan sat on the board of AT&T, and he didn't like the looks of things. In just two short years the telecom giant had committed $110 billion to buy a slew of cable TV assets. Almost half of that, $48 billion, had been used to buy Malone's former company, Tele-Communications Inc., also known as TCI. The other $62 billion went to cover the cost of acquiring MediaOne Group. The two deals grabbed headlines around the world. They also catapulted AT&T to the top of the cable heap. With TCI and MediaOne under its belt, AT&T had bragging rights to being the biggest cable TV operator in America.

It was an expensive way to get there, no doubt. But it was also fast -- just 24 months from start to finish. That was by design. AT&T's chairman and chief executive officer, C. Michael Armstrong, was racing the clock. The company's core long-distance business was dying. Per-minute prices had dropped 75 percent in just two years, and they were still trying to find a bottom. The problem, for AT&T, was that long distance still accounted for 100 percent of its profits. Unless Armstrong could find a steady revenue stream to offset his jaw-dropping declines in long distance, AT&T was history.

By June of 2000, Malone's indigestion was kicking in strong. His back-of-the-envelope calculations kept leading him to the same troubling conclusion: AT&T was drowning in a sea of short-term debt. The culprit was MediaOne. As soon as the deal closed, AT&T's debt had shot up to $65 billion. Almost half of that was tied up in short-term commercial paper that would have to be paid back in less than a year. Cash was also tight. The reason, once again, was MediaOne. To close the deal, AT&T wound up having to fork over $24 billion in one lump sum. That was a big nut, even for a company of AT&T's size.

Malone was furious. As far as he was concerned, the MediaOne deal structure was just plain stupid. AT&T had no downside protection. So long as its stock price stayed aloft, everything would be fine. But if the financial markets turned, the short-term debt could eat AT&T alive. The point, for Malone, wasn't purely academic. Most of his net worth, more than $3 billion at the time, was tied up in AT&T stock. If the company took a tumble, he was going to get dragged along for the whole woolly ride.

Malone was no Chicken Little. Quite the contrary, he had a reputation for being one cool cat, and for good reason: He was. Malone never broke a sweat. Not over deals, anyway. Over the course of his 25 years in the cable business, Malone had been involved in hundreds of trans-actions of every size and type imaginable. His calling card was financial complexity. Malone deals were notorious for having so many moving parts that you could get cross-eyed just trying to keep up.

Malone learned his art, so to speak, at TCI. When he saddled up there as president in 1973, TCI's shares were selling for just 75 cents apiece. The banks wouldn't even think about lending money to TCI. Wall Street also looked the other way. A lot of guys would have folded their cards and walked. Not Malone. He just rolled up his sleeves and got to work.

His solution? Deals, my friend, deals. Over the next two decades, Malone bought hundreds of companies, and parts of companies, to transform TCI into the cable industry's undisputed leader with more than 11 million customers, 14 million if you included "affiliated" cable partners. (The latter was Malone-speak for companies in which TCI had an investment.) TCI had no collateral -- the company was running on fumes and its stock was basically worthless. So Malone had to use his smarts to come up with unconventional deal structures to keep things moving along.

It worked. By the time Malone announced plans to sell TCI to AT&T in 1997, that same 75-cent share was worth almost $4,200. And Malone? Owing to the financial magic he had worked for TCI, he was a fabled and feared dealmaker. So, no, John Malone was no Chicken Little, especially when it came to complicated, long-shot deals.

But the MediaOne deal -- that one bothered him. The short-term debt, in particular. In board meetings, Malone did what he could to sound the alarm: "How much do we owe?" If he'd asked the question once, he'd asked it a dozen times. It was Malone's way of trying to draw a bead on the crushing debt load. It didn't do much good. AT&T was pinning its hopes to the future of Armstrong's $110 billion cable strategy. About the last thing anybody wanted to talk about was the dark side of AT&T's fast push into cable -- the gut-busting debt load. Except Malone, that is. It was all he could think about.

Armstrong, known as Mike to just about everybody, wasn't too concerned. To be sure, the MediaOne deal got pushed through quickly. But he really had no choice. By the time AT&T decided to make a run for it, MediaOne had already announced plans to merge with Comcast, so he had to hustle. Sure, the $62 billion sticker price was rich -- real rich. But Armstrong was in a footrace with time, and seconds counted. Revenues in AT&T's core long-distance business were falling by 10 percent a year, and the rate of erosion was accelerating by the quarter. The way Armstrong saw it, cable TV was AT&T's best, and possibly only, hope for the future.

His plan was simple but potentially effective: By using upgraded cable TV lines, AT&T could sidestep the Bells and go directly to the home with a branded package of voice, data, and video services. To make the plan fly, however, AT&T needed a long reach. That's where MediaOne came in. TCI and its affiliates had 14 million customers; MediaOne had another 5 million. Together, however, they had access to more than 41 million homes. It wasn't blanket coverage, for sure. But it was enough to at least give AT&T a firm foothold in major markets across the country.

Armstrong wasn't worried about MediaOne's financing. Dan Somers, the chief financial officer, was a seasoned professional. He also knew a lot about the cable TV business. The two of them had worked shoulder-to-shoulder to reel in TCI. Then they turned on a dime and snatched MediaOne away from Comcast. Malone had a point about the debt -- $65 billion was a big nut. But so what? It was still better than seeing AT&T go out of business, which was exactly what AT&T was looking at if his rescue plan didn't work out.

Malone could tell that his outspokenness was starting to grate. The cable titan even joked about it on occasion, referring to himself as "the turd in the punch bowl" on the AT&T board. Malone didn't really care. AT&T's crushing debt load was a financial disaster just waiting to happen. And the fact that nobody else on the board seemed bothered by that chilling possibility was driving him crazy.

At the very next board meeting, opportunity knocked.

Malone found himself sitting next to Sanford "Sandy" Weill, the chairman and co-CEO of Citigroup. Within the rarefied fishbowl of the AT&T board, Weill was a singularly powerful figure. In addition to sitting on the finance committee, he was also tight with Armstrong, who sat on the Citigroup board. Malone decided to make his move.

About a quarter of the way into the meeting, Malone leaned over to Weill and calmly whispered into his ear. "Sandy, I think we could be in for a commercial paper rollover default." Malone used the gilded language of high finance to couch his concerns.

Weill's head snapped around like a slingshot.

The Citigroup chief immediately understood the gravity of what Malone was saying: AT&T was in danger of defaulting on its commercial paper. AT&T had a staggering amount of short-term paper on its books -- $28 billion in all.

The implications of Malone's dire warning were enormous. One of the biggest commercial paper defaults in history -- by Penn Central in 1970 -- had tipped the scale at just $82 million. And even that default, puny as it was by comparison, had roiled the markets for weeks. What Malone was talking about was a commercial paper default that was so big, so injurious, that it would surely cause widespread pandemonium among AT&T's investors. The stock price would probably get gutted. So would the stock prices of every other publicly traded company within spitting distance of telecom. The ripple effect could be dev2astating.

"You really think so?" Weill shot back, his eyes wide with dismay.


Malone settled back into his seat. "You need to look at it yourself," the cable titan coolly answered, lowering his voice just a notch so nobody else would hear. "But, yeah, Sandy, I really think so."

By the time Malone lobbed in his verbal hand grenade, AT&T's new chief financial officer, Chuck Noski, was arriving at some hard conclusions on his own.

The debt load was ugly -- $65 billion. As Malone had rightly surmised, AT&T's short-term obligations were the real problem. AT&T had $33 billion in short-term loans. The majority of that, $28 billion, was tied up in short-term commercial paper. Some of the repayment deadlines were exceedingly short, 90 days or less. The problem -- and it was a big one -- was that AT&T only had about $20 billion in annual cash flow. And most of that was already committed to other projects. About $3 billion was earmarked to cover the annual dividend. Another $15 billion or so was budgeted for capital construction projects. That left AT&T with a grand total of just $2 billion to cover all of its other obligations, including the $28 billion in outstanding commercial paper.

In banking terms, AT&T was looking at a full-blown liquidity crisis. Put another way, AT&T, as of the summer of 2000, was just about broke.

Nobody used that term, of course. Working Joes like you and me go broke. Blue-chip stalwarts of industry like AT&T generally don't. And one big reason they don't is because they keep revolving lines of credit in place for just these sorts of emergencies. So even though AT&T was looking at a $25 billion shortfall and didn't technically have the funds on hand to make up the difference, the telecom giant had solid backup lines in place that it could tap into on a moment's notice.

Or at least that's what Noski was hoping.

Combing through the books, Noski made a stomach-churning discovery: The backup lines had been rolled back by two-thirds, leaving AT&T with a sole backup facility of just $10 billion. That was going to leave AT&T short by $15 billion, at least. The upshot: AT&T was looking at the very real possibility of a major commercial paper default, just as Malone had suspected.

Now Noski was worried.

If word got out that AT&T was about to default, investors would go wild. Retribution would be swift and brutal. AT&T as a $2 stock? It wasn't that far-fetched.

AT&T's credit rating was Noski's biggest concern. By then the Internet bubble had begun to lose steam. The red-hot telecom market was also cooling off. The shift was problematic, and here's why: By then a lot of carriers, including AT&T, had taken on enormous amounts of debt to help finance their long-term business plans. That worked fine so long as the markets were humming and the cost of debt was affordable. But if investors turned and the debt markets dried up, interest rates would soar. That, in turn, could cause the financial markets to tank. A lot of the smaller carriers that had financed their dreams using debt probably wouldn't make it.

The ripple effect on AT&T was bound to be devastating. AT&T was already paying more than $2 billion a year in interest payments, and that was with a strong "A-2" rating. If AT&T's ratings got reduced, those fees could skyrocket. Worst of all, AT&T could lose its commercial paper rating. If that happened, the carrier wouldn't be allowed to roll over, or "term out," its paper into a conventional bank loan. With only insufficient backup lines in place, AT&T would quickly find itself at the mercy of the major banks. That, of course, was about the last place you ever wanted to be in the middle of a financial emergency -- over a barrel, dealing with a bunch of excited bankers.

Noski swallowed hard. At best, AT&T was looking at a major financial restructuring. At worst, if nothing went its way and the banks were unwilling or unable to extend additional facility for its backup lines, AT&T was looking at a possibility that was almost too awful, too outrageous, to even contemplate.


The word seemed incongruous in connection with the grande dame of telecommunications. AT&T was a sturdy survivor of history. Over the course of its long, magnificent life -- 125 years in all -- AT&T had helped birth the Industrial Age, and survived two world wars and the Great Depression. It had also survived natural disasters, management disasters, and too many political upheavals to count. That the company could have come so far, and survived so much, only to be done in by a single cable transaction that never should have been attempted in the first place was simply unfathomable. The whole thing was so over-the-top you almost had to laugh.

Noski didn't, of course. He was too steamed. You really couldn't blame him. When he was being recruited, nobody had bothered to tell him about AT&T's shaky finances. Not Dan Somers, his predecessor as CFO. Not John Petrillo, AT&T's executive vice president of corporate strategy. Not John Zeglis, AT&T's president. Not Mike Armstrong. Just to be safe, Noski had even buttonholed a few directors. Their story was the same: AT&T was on the verge of one of the great comebacks in U.S. corporate history. They'd all waxed on for hours about the noble challenge of trying to use cable TV to turn one of the world's most beloved companies into a New Age media giant. But nobody said a goddamned word about there being a truckload of plastic explosives parked in the basement. And the fuse had just been lit.

Noski hit the roof when he found out. He later tracked Somers down and asked him point-blank why he hadn't bothered to come clean about AT&T's finances. Somers didn't miss a beat: "Because I wanted you to take the job," he joked, a big smile washing across his face. Noski got a similar shuck-and-jive response from John Petrillo. "I didn't want to oversell the opportunity," Petrillo quipped, trying vainly to coax a smile out of his inquisitor.

Noski was speechless. You wanted me to take the job? AT&T was within spitting distance of a major financial meltdown. Billions upon billions of dollars in shareholder value were at risk. So was the company's hard-won reputation -- with customers, employees, regulators, Wall Street, and millions of small investors. Indeed, thanks to their ham-fisted handling of the MediaOne deal, AT&T's future was suddenly, and inexplicably, up for grabs. And the best they could offer up was a couple of lame one-liners? But Noski couldn't worry about any of that right then. The clock was ticking.

How could AT&T, one of America's greatest and most enduring corporate success stories have lost its way so fast?

Unlike other high-profile corporate flameouts, including Enron and Tyco, AT&T's undoing didn't stem from spectacular off-balance sheet transactions. Nor was it the victim of creative accounting of the sort that did in WorldCom, America's No. 2 long-distance company. So what felled mighty AT&T? One root problem, sad to say, was nearly as old as the company itself: good, old-fashioned mismanagement. Overconfidence and incompetence, which do seem to go hand-in-hand in the executive suite these days, played a major role. So did bad timing and the suffocating corporate culture at AT&T. WorldCom's insidious game of now-you-see it, now-you-don't revenues and profits also didn't help.

In the end, the AT&T board swooped in and saved the day. Sort of. After approving $110 billion worth of cable purchases so that AT&T could transform itself into a modern-day media Goliath, the board reversed course and decided, instead, to break up the company into four businesses: AT&T Broadband, representing the cable TV assets; AT&T Wireless, representing the old McCaw cell phone systems that had been acquired in 1994; and AT&T, representing the core long-distance business. Trying to put a positive face on things, AT&T even gave its massive restructuring a rather hopeful-sounding name: "Grand Slam."

AT&T's investors, who'd been through a lot by then, responded by driving down AT&T's shares by more than $3 that day. Investors were rightly tired of AT&T's excuses, and even more tired of its thinly veiled attempts to use financial engineering to cover up its miserable performance. The plunge, together with the previous downward ticks in the stock price, succeeded in wiping out more than $100 billion in shareholder value for the year. It wasn't quite the grand slam that AT&T had been hoping for, but it was breathtaking commentary, nonetheless.

The dividend also took its final bow. As part of the restructuring, AT&T said that it was rolling back the vaunted dividend by 83 percent. The company tried to play it cool, noting that the restructuring, including the dividend cut, would create greater long-term value for shareholders. But as symbols go, it was a primal scream heard around the world. AT&T's dividend had never been cut, not by even a penny. During the Great Depression, AT&T had slashed costs and reduced head count to scrape by. But the dividend? Untouched. Now, just 36 months into the Armstrong Era, the board was being forced to break every rule in AT&T's century-old playbook just to last until the next quarter.

To avoid the indignity of seeing AT&T's stock wind up as a $2 issue, the board also approved a 5-for-1 reverse stock split. The move was clever in that it helped sustain the stock price. But it was also cynical, backward looking, and bursting with greater meaning. In approving such a robust reverse split, AT&T was tacitly acknowledging that it was unable to keep the stock price aloft without using sleight-of-hand to get there. If only there had been an accounting trick handy that could have wiped out the 36 prior months entirely.

Armstrong tried his best to sound upbeat. "This is a pivotal event in the transformation of AT&T we began three years ago," he asserted in a prepared statement. Grand Slam, he continued, "creates a family of four national service providers that will be even better equipped" to serve customers. The AT&T chief pointed out that the four companies would continue to function as one owing to a series of inter-company agreements. In other words, the cable strategy wasn't really dead. It was just taking on a new life form.

Nobody bought it.

"It's hard to escape the feeling that a corporate funeral took place today," Ken McGee, an analyst with Gartner Group, told The Wall Street Journal. And McGee was being kind compared to some of the commentary that was floating around on Wall Street that day. Armstrong didn't see it that way. Talking to investors, the AT&T chief openly bristled at the suggestion that the breakup was a reversal of his famed strategy. When one analyst dared to ask him to talk about AT&T's strategic "reversal," Armstrong roared that he found such characterizations to be "not only wrong, but offensive." The quote would become an instant classic.

In hindsight, Armstrong's passionate defiance wasn't so surprising. Truth be told, nobody was more upset about the breakup than Armstrong. He'd come to AT&T to save it, not to tear it apart. But to admit that he was being forced to abandon his beloved cable strategy less than three years after its inception was to admit failure. And Armstrong wasn't willing or wired to do that -- not for AT&T, not for the board, not for anybody. Imbued since childhood with a sense of raw optimism -- about life, about himself, about his special place in the world -- the prospect of ending his 40-year career on such a sour note was impossible for him to even contemplate. So he talked himself into a new reality, and then dared the world to challenge it.

As this is being written in March 2005, AT&T's future is once again secure. Sadly, this security owes to an outright sale of the company, not to any magic strategic fix. The buyer is SBC Communications, which agreed on January 31 to pay $16 billion for the iconic company. It's quite a bargain, especially considering that AT&T's market value, at its peak during the Armstrong Era, was more than $100 billion. Once the deal closes, AT&T will become the sole property of SBC, thus ending, for all time, its existence as an independent company.

The deal virtually guarantees AT&T a future. That, as Martha Stewart might say, is a good thing. But it's also a sober reminder of how far AT&T has fallen. When Armstrong's cable strategy was unveiled in the late 1990s, AT&T was red-hot. It was also untouchable. Its stock price soared to $95 amid high hopes that Armstrong would execute on his grand vision. Lately, AT&T's stock has been trading near $20, reflecting renewed optimism about its prospects in the arms of SBC. Before SBC showed up, however, the stock had struggled to stay in the mid-teens. AT&T's core long-distance revenues, meantime, are continuing to melt away at an astonishing rate of 20 percent a year. That is double what it was in the fall of 1997 when Armstrong first walked in the door. The acceleration is owed to the rapid decline of the long-distance business, which is being overtaken by advances in technology and the rise of wireless as an alternative to traditional phones.

It remains to be seen if SBC's chief, Ed Whitacre, can plug AT&T's holes. But if anybody can pull it off, he can. Whitacre, who hails from Ennis, Texas, is a 40-year veteran of the Bell System. He's also a singular force in telecom. Over the course of his remarkable 15-year run as CEO, Whitacre has unfailingly followed his gut instincts. And he's done so without giving in to the latest fads on Wall Street, and without compromising, even a little, his grander strategic vision. He took a lot of slings and arrows in the process. But the end result speaks for itself. Thanks to Whitacre, the smallest of the regional Bells -- Southwestern Bell -- is now the biggest. One can't help but wonder how AT&T might have fared if it had a bulldog like Ed Whitacre leading the way back in 1997.

You have to give Dave Dorman, AT&T's current chairman and CEO, a lot of credit for being willing to make the tough call to sell the company. Dorman ascended to the top spot in late 2002. To say that he inherited a water-weak hand would be putting it mildly. AT&T had just been broken up like Humpty Dumpty, and its future was highly uncertain. Determined to keep the ship afloat, Dorman slashed costs, reduced headcount, and pared debt. He also overhauled AT&T's business strategy to focus almost exclusively on big business customers. Dorman wasn't able to save AT&T -- nobody could have, at that point. But his bold actions and level thinking did manage to put the fabled company on a fast sled to its destiny.

AT&T watchers will probably spend years, if not decades, debating the finer points of what went wrong and who, exactly, was to blame for the company's spectacular collapse. To be sure, plenty of people contributed. Over the course of its long, illustrious life, AT&T churned through a dozen CEOs and scores of top managers. Some of these executives were brilliant; others not. But one name, without question, sits right at the top of the list: C. Michael "Mike" Armstrong. When he arrived at AT&T in the fall of 1997, he had a halo around his head and the future of the company in the palm of his hand. By the time he stepped down on November 18, 2002, the halo was long gone -- and so was the American icon known as AT&T.

"Assume nothing" was one of Armstrong's longtime managerial mantras. He even kept a brass plaque emblazoned with those very words on his desk at AT&T. It was Armstrong's way of reminding himself, every single day, to do his homework. Be smart. Don't get caught short. It was a good instinct. It's too bad he didn't take his own advice.

Armstrong made all sorts of assumptions. He assumed that Wall Street, which had hailed him as a turnaround artist, would continue to support him. He assumed that his chief financial officer, Dan Somers, would exercise care in crafting AT&T's deals. He assumed that his cable guru, Leo Hindery, would deliver. He assumed, along with the rest of the telecom world, that WorldCom wasn't lying. He assumed that the financial markets, which had soared to breathtaking highs, wouldn't crash and burn. He assumed that AT&T's senior managers, even those who coveted his job, wanted him to be successful. He assumed that the powerful AT&T board, which had lured him in with promises of grandeur, would always see things his way. He assumed that the dense AT&T culture, even if it didn't love him, would at least give him a chance. He assumed that he would leave just as he had come in -- as a hero.

Armstrong was wrong about all of it. Dead wrong, in some cases. But by the time that became apparent, his time was up. Like General George Custer at his famous last stand, the AT&T chairman, by the end, would be boxed in tight with nowhere to go but straight down to a bitter infamy. He didn't go alone. Dan Somers, the former chief financial officer-turned-cable executive, went with him.

Investors got the worst of it, by far.

Michael Balhoff, the former head of telecom equity research for Legg Mason Wood Walker in Baltimore, did an analysis of AT&T's stock performance for this book. According to Balhoff, who is now the managing partner of Balhoff & Associates, investors saw their shares erode by 53.6 percent during Armstrong's five-year run. During the same period, he notes, the S&P 500 lost just 4.6 percent of its value, and that included all the financial carnage associated with the Internet bust. The loss was even more stunning -- 77.9 percent -- during the frenetic cable-acquisition period. (To read Balhoff's complete stock analysis, please turn to page 288.)

Hard to believe, but things could have turned out much worse. AT&T could have landed in the junkyard along with WorldCom and Global Crossing. Whether America's banking institutions would have permitted a company of AT&T's stature and legacy to fall into Chapter 11 is debatable -- some say yes, others say no. But such academic musings miss the point. The sad fact of the matter is that AT&T should never have been pushed that far to begin with. And the fact that it was pushed that far is the real failing, and the real lesson, of the Armstrong Era. AT&T had the size and girth to weather a lot. But not even a brute like AT&T could tolerate financial recklessness, at least not for long, as her fast tumble so vividly illustrates.

No single decision felled AT&T. Rather, the company's demise came about by a thousand cuts, starting with the decision to bring in Armstrong as the CEO. That was compounded by the decision to keep Dan Somers on as the CFO. Then came the MediaOne deal, and everything unraveled from there. There were scores of other bad decisions in between, each linked to the other in a mad daisy chain of managerial incompetence. By the time it all came to a head in the summer of 2000, AT&T was teetering on the edge of financial ruin. By one measure, it was quite a feat to pull off. In just 36 short months Armstrong and his team managed to take one of the sturdiest survivors of history and reduce it to a question mark. The last time AT&T was in that much financial trouble Alexander Graham Bell, quite literally, was still on the payroll.

To be sure, Mike Armstrong didn't single-handedly drive AT&T into the ground. He had plenty of help.

His immediate predecessor, Robert E. Allen, missed the opportunity to reposition the telecom giant for a more secure future. For nine long years he debated what to do, and in the end did very little. Leo Hindery, who served as Broadband's first president, promised to deliver the entire U.S. cable TV industry to AT&T's doorstep. He didn't even come close. Dan Somers, the chief financial officer, arguably inflicted the most pain. On a positive note, Somers was energetic and creative. On the downside, he never saw a deal he didn't like. As a result, he showed none of the normal conservatism associated with the CFO's office. His optimistic style of deal making would later give rise to a new term: "Sommered." As in, "I'm not going to get Sommered [taken to the cleaners] on this deal." AT&T's suffocating corporate culture also didn't help. So dense it even has its own name -- the Machine -- the culture despised Armstrong and despised what he stood for: change.

AT&T's blue-chip board also deserves some blame. The board, which included such captains of industry as Sandy Weill of Citigroup, Ralph Larsen of Johnson & Johnson, George Fisher of Kodak, and

Tom Wyman of CBS, sat mutely by as Dan Somers jammed through bad deal after bad deal. Then it sat by again as he rolled back AT&T's emergency backup lines -- twice -- to save a few million in banking fees. The rollbacks would leave AT&T perilously exposed in the aftermath of the MediaOne deal, triggering a series of events that would culminate with the company's breakup.

Perhaps the biggest monkey on Armstrong's back, however, was the one he never saw coming: WorldCom.

Quarter after quarter, WorldCom wowed Wall Street, and bewildered AT&T, by posting impressive gains in its core long-distance business. WorldCom's stock price soared along with the reputation of its storied chairman, Bernie Ebbers. AT&T, meantime, was getting pummeled at every turn for being too slow, too dumb, too Ma Bell. Chided by Wall Street to keep up, Armstrong pushed his troops hard. When that didn't work, he started slashing budgets to reduce costs. When AT&T still couldn't seem to get clear of WorldCom's exhaust fumes, he pushed even harder. Determined to not let WorldCom waltz off with the lucrative business market, Armstrong dropped his retail prices -- over and over again.

As we all know now, the AT&T chief was chasing shadows. Regulators later accused WorldCom of using accounting chicanery to achieve its stunning numbers--the whole thing was basically a farce. By the time the $11 billion ruse was revealed, however, it was too late for AT&T. By then scores of management decisions related to marketing, pricing, and more had already been made and pushed down through the organization. Careers had been made and broken. Budgets had been slashed and reworked. Customers had been won and lost. All in a valiant attempt to catch a runaway train that never existed.

It's hard to predict how history will judge Mike Armstrong.

On the plus side, he had the guts to stand tall at a time when AT&T employees sorely needed someone, and something, to believe in. It's also clear that he had exactly the right strategy at exactly the right time. Armstrong's bold idea of using upgraded cable TV lines to deliver voice, data, and video services directly to the home, particularly when viewed from the rearview mirror of today, was spot-on. So was his notion of keeping everything under one roof. "One cable. One company. Countless possibilities." That was AT&T's tagline on the TCI deal. It was elegant, simple, and brilliant. Verizon, the super-sized communications company based in New York, followed a similar path, and now it's the biggest player in America with more than $70 billion in annual revenue. Verizon recently began adding video to its ever-growing bundle of services, further affirmation of Armstrong's prescient cable strategy. SBC, based in San Antonio, is following a similar path.

But when you hit the mute button on all the outside noise, including WorldCom's fraud, the dissonance of Leo Hindery, and even the dubious financial wizardry of Dan Somers, it all comes down to this: Mike Armstrong failed to execute. Period. No matter how you slice and dice the numbers -- and Armstrong's supporters are quick to spin the arithmetic -- he failed to save AT&T. And he didn't fail by just a little. He failed by a lot. Carving up AT&T like a retired racehorse that's been carted off to the glue factory was never the right answer. It was the easy answer in that it provided a short-term fix to AT&T's looming credit crisis. (A crisis, I would point out, that grew out of a string of bad management decisions at the top.) But it was also a hollow victory, as AT&T's current predicament so aptly illustrates.

We'll never know for sure how things would have turned out if Armstrong had managed to hang tough and soldier on. With a few lucky breaks and a sharp-eyed CFO looking over his shoulder from the start, who knows? Instead of standing on its last wobbly legs, AT&T today could have been giving the monster Bells, including SBC, an exceedingly hard time in the marketplace. Cable companies, which continue to handily dominate their local markets, also would have been well challenged. Wireless? Ditto. Though AT&T Wireless was admittedly weak in terms of its management, it had the girth and heft to become a major force in the industry. Cingular, which is a joint venture of SBC and BellSouth, certainly thought so. In 2004 it agreed to buy AT&T Wireless for $42 billion. The deal, which marked the largest all-cash transaction in U.S. corporate history, allowed Cingular to leapfrog Verizon to become the No. 1 wireless carrier in America. The man behind that transaction? SBC's Ed Whitacre. Not many people know it, but Whitacre actually tried to buy AT&T Wireless a few years earlier, but BellSouth balked. True to form, Whitacre never abandoned the idea -- he just put it on ice for another day.

If only AT&T's chief had had the same sort of resolve. Sad but true, if Armstrong had made different choices at key junctures along the way, AT&T, in all probability, would still be in one piece today. Tethered to cable, wireless, and the exploding universe of IP -- short for Internet Protocol, which is quickly becoming the underpinning of international commerce -- AT&T would have been a global communications force to be reckoned with. Not just today, but for generations to come. Proud, iconic, formidable. It would have been the AT&T that we all grew up with, only better--just as Armstrong so boldly envisioned back in 1997. How sad, even tragic, for Mike Armstrong. And how tragic, especially, for AT&T.

Copyright © 2005 by Leslie Cauley


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