Once AT&T;’s Savior, CEO Seeks His Own

C. Michael Armstrong likes to tell the story that his granddaughter prayed when he left California three years ago to take the helm at the telephone and cable giant AT&T; Corp.

“Well God, I guess this is goodbye. We’re moving to New Jersey tomorrow,” Armstrong often relates the toddler as saying as the family moved to AT&T; headquarters in Basking Ridge, N.J., where he took on one of the most daunting jobs in corporate America.

Now, with AT&T; stock dropping 54% this year and the board breaking up the company under a restructuring plan, Chairman and Chief Executive Armstrong might be excused for seeking divine assistance himself.

The Economist magazine put it bluntly last month: “Michael Armstrong has spent $110 billion on turning AT&T; into a broadband-communications powerhouse. But unless he can fix its sagging share price, he may not survive to see his strategy through.”

Tom Hudson, who manages Lord Abbett Affiliated Fund, which until recently owned AT&T; stock, said that there was confusion among consumers about the telecommunications options on the market today and that AT&T; underestimated the competition.

“Mike would be the first to admit that they truly didn’t understand what they were up against,” Hudson said.

“The big question is ‘What happens to Mike?’ ” Brian Adamik, president of the Yankee Group technology consulting firm, said of the restructuring. “He may just be the transitional chairman. My sense is that, at the end, he would step down.”

How quickly the tide turned against Armstrong, 62, who just 18 months into his reign at the largest U.S. telephone company was being hailed for turning around the sleeping giant founded by Alexander Graham Bell 125 years ago.

AT&T; had been stuck in low gear in the years after the court-ordered break-up of the old telephone monopoly, and was not responding to, let alone leading, the breathtaking pace of change in its industry. Market share was perpetually eroding, and AT&T; appeared to have no strategic plan in hand to lead it beyond long-distance service or to jar it from the slow-to-no-growth rut under longtime Chairman Robert Allen.

After a three-month hunt, it lured aboard the Harley-Davidson-riding Armstrong, a 31-year veteran at IBM Corp. who had earned a reputation as a turnaround specialist during his stint as head of the Hughes Electronics Corp. division of General Motors Corp.

Under Armstrong’s direction, AT&T; cut its costs, shed 18,000 jobs and forged acquisitions and alliances aimed at advancing its positions across the spectrum of its operations and breaking into new businesses, such as cable television.

On the local phone service front, where AT&T; is weakest, it bought Teleport Communications Group Inc. In the booming wireless market, it bought Vanguard Cellular Systems Inc. and launched an aggressive pricing plan that shored up its position as the nation’s largest wireless phone service provider.

Armstrong struck a deal with IBM to take over Big Blue’s global communications network, expanding AT&T;’s international reach and its small but fast-growing data transmission business.

It forged international service alliances with several of the biggest non-U.S. telecom companies, including British Telecommunications, Japan Telecom Co. and Japan’s Nippon Telegraph and Telephone Corp.

But its biggest coup under Armstrong was its explosion onto the cable television scene, first through the purchase of Tele-Communications Inc., which in a single $55-billion swoop made it the nation’s No. 2 cable TV operator, and then through its surprise bid to steal MediaOne Group Inc. from Comcast Corp.

The Detroit-born Armstrong is often cited as the very model of a modern CEO, who looks at the big picture but also gets involved in the details. Armstrong was greeted at AT&T; in 1997 as a savior. When he arrived, he told employees his mission was to show that “this elephant can dance.”

Three years on, investors are asking whether it is dancing to the right tune.