AT&T;’s Loss on Wall Street Spurs Talk of Breakup Plot

John Malone, the former cable mogul known as one of the media world’s most astute investors, isn’t looking too smart after suffering a paper loss of $1 billion since December in AT&T; Corp.’s stock slide.

And Malone isn’t a good loser.

The Denver-based billionaire, who became the telecommunications company’s largest shareholder in the 1999 sale of cable giant Tele-Communications Inc. to AT&T;, has gone into overdrive to recover from the loss. He has telegraphed his impatience to Wall Street for months with increasing frequency and made himself a chief irritant of Chairman C. Michael Armstrong.

There is only one way for Armstrong to appease Malone: Raise the stock price.

How best to do that is the agenda of meetings next week of AT&T;’s board and management. At the annual two-day retreat starting next Thursday, Malone’s latest proposal to unlock the value trapped within AT&T; will be unveiled.

It’s a radical plan that’s unlikely to fly with the conservative board. That’s because it could put the company on track to be dismantled. A breakup of AT&T; would go down as one of the biggest flameouts of all time, ending the long decline of what was once one of America’s greatest innovators and safest investments.

Malone would sell off the prized wireless business to showcase the value of AT&T.;

Sources say Malone and his old crony Craig McCaw would merge the cellular pioneer’s Nextel Communications Inc. with AT&T;’s valuable wireless business to form a new company.

Other alternatives for improving the company’s value will be presented by investment bankers and AT&T;’s management. Some of the options could be put to a board vote.

If the 59-year-old Malone seems overly eager, it’s because he’s itching to put his money elsewhere. Once-in-a-lifetime technology opportunities such as the sale of Hughes Electronics Corp. with its DirecTV operations, could pass him by. With so much of his net worth tied up in a depressed stock, the technology visionary, who built TCI into the most powerful cable player, is trapped.

After a huge block of AT&T; shares were traded Wednesday, Wall Street speculated that Malone’s frustration had finally come to a head. Word was that he had orchestrated the ouster of Armstrong and was taking the helm himself.

AT&T; declined to comment, but Malone’s company, Liberty Media Corp., quickly denied the rumors. Institutional traders were blamed for the volatility.

The company’s shares rose $1 to close at $31.75 on the New York Stock Exchange on Wednesday in heavy trading, partly on the rumors about a management shake-up.

The speculation underscores a behind-the-scenes power struggle that has been raging for months and could play into next week’s retreat.

As a board member and an influential shareholder, Malone is playing a pivotal--and controversial--role in an ambitious corporate transformation that has so far gone awry.

Since taking the helm at AT&T; three years ago, Armstrong has gone on an acquisition spree to reduce the company’s reliance on the declining long-distance telephone business. By buying up cable systems, AT&T; has stepped into more promising areas such as the local phone business, interactive television and high-speed Internet access.

But the expansion has yet to pay off. The company has lost half its value since December as a decline in its long-distance business deepened.

In selling TCI, where he was chairman and chief executive, Malone scored about 33 million AT&T; shares, worth $2.2 billion when the deal closed in March 1999. He cashed out a small portion of his holding, for $250 million, when AT&T; shares were near a peak last year. People close to him say Malone is now kicking himself for not selling more.

If Malone is shut down by the board at next week’s meeting, sources close to him say not to count him out. The cunning Malone is dead set on finding an escape hatch.

“John is about shareholder value. How he gets there is secondary,” said one source close to the financier. “If he loses some money, it’s the price of doing business. But he won’t rest until he proves he’s smarter than the guys who bought his company and messed things up. That means getting the stock price up any which way he can.”

Malone has already bruised egos on the AT&T; board with unorthodox tactics to pressure them into action. Still boasting a personal net worth of $3.4 billion, Malone isn’t fazed about losing a few million, as he did in June, if he can beat the board into submission with well-timed sales.

When he dumped 1 million AT&T; shares near the stock’s three-year low in June, investors were confused about whether it was a signal for them to buy or to sell. Some say the move was a thinly veiled threat to AT&T.; If they didn’t heed his recommendations, the wily Malone could destabilize the company using his remaining 28 million shares.

Unimpressed with boardroom decorum, Malone riled directors this spring in a Wall Street Journal article outlining ways he would mobilize the stock if he were the boss.

One director called Malone’s antics “inappropriate” and insulting to Armstrong and other board members.

Malone at the same time has used money from the TCI sale to invest in at least a dozen companies that are aiming to challenge AT&T;’s businesses. Through Liberty Media, controlled by Malone but partly owned by AT&T;, Malone has invested in wireless upstarts such as ISky, IBeam, GeoCast and Teligent. As part of his deal with AT&T;, Malone kept control of all of Liberty’s voting stock.

Analysts say these deals signal Malone’s lack of confidence in the traditional cable and phone businesses that account for the bulk of AT&T;’s revenue. Yet the phone company has little recourse.

Sources close to him say one reason Malone has not already quit the AT&T; board and sold his stock is because he needs to protect his cherished Liberty until he can pry it loose from the phone parent’s grip. More than half of Malone’s net worth is tied up in Liberty, which has its own publicly traded shares. Liberty holds major stakes in Time Warner, News Corp., USA Networks, Telemundo, Emmis Broadcasting, Discovery Communications and QVC.

Now, Malone is eager to help his friends at News Corp. buy El Segundo-based Hughes, which is in the process of finding a buyer.

Malone seems always to find ways to shuffle his assets to expand his influence into headier media spheres. His early stake in Turner Broadcasting gave him a sizable chunk of Time Warner after the entertainment giant bought the cable programmer. He turned investments in a handful of regional sports networks into a venture with News Corp. that he converted last year into an 8% stake in the parent company. A group of broken down stations was the foundation of a 20% stake in USA Networks.

AT&T; has already set out on a course to restructure itself. It spun off 16% of its prized wireless business to the public six months ago to showcase the value in hopes of propping up the parent stock. Though it didn’t work, the company could pursue a similar strategy for the long-distance operation, which would remove a drain on the parent company.

Merging AT&T; Wireless with Nextel would be much more radical. Malone is willing to bet that splitting off the wireless group entirely from AT&T; could make it easier for Wall Street to value the rest of the company’s assets, while underscoring their current trading discounts.

Without wireless, AT&T;’s stock could fall to between $12 and $14 a share, according to analysts’ valuations, down from the low $30s today. AT&T; would be valued on the market at less than half of its current $119 billion, at closer to $50 billion. Even at today’s steep discounts, AT&T;’s cable assets alone are worth $48 billion or more, meaning long distance and business services units would not be accounted for in the market valuation.

Credit Suisse First Boston estimates that shareholders could reap the equivalent of $73 a share from a sale of the parts.

But the Nextel deal is far from a slam-dunk. In June, the board nixed a similar proposal under which AT&T; Wireless would buy Nextel, deeming it as too pricey. Malone and McCaw have revised the terms, but it is unclear how the proposal will measure up against others that will be presented.

In today’s heated AT&T; boardroom, Malone plays the imposing antagonist, brilliant, but remote and even brooding. He’s a massive John Wayne-like figure, with penetrating, cold, dark eyes. Malone built his fortune through complicated financial and tax maneuvers, and from the intellectual force of his vision.

While revered by his employees--one former Liberty president bought him a Harley for his 59th birthday--Malone was wanting as a manager. Interested mostly in deal making, he drove TCI into the ground, squeezing out value for shareholders and himself, and pushing the company to the brink of bankruptcy in 1996.

By contrast, Armstrong comes across as a frat boy. He climbed the corporate ladder using his twinkling blue eyes and politician’s smile to become the consummate company man. Before joining Hughes, he was passed over for the top job at IBM, after rising through the ranks.

Critics hold Malone partially responsible for AT&T;’s current bind. They say he and his fix-it man, Leo Hindery, who swept in as president to save TCI from financial disaster, seduced Armstrong into paying top dollar for broken-down cable systems that no other company in the industry would touch. Desperate to exit cable before new competition from satellite and phone companies decimated the industry’s monopoly powers--and margins--Malone targeted AT&T; and Armstrong as his best hope for a sale.

Armstrong, freshly planted at AT&T;, needed a magic bullet. Price wars were punishing and new technologies were threatening to eventually reduce the long-distance business to nothing. Deregulation promised to open the floodgates to competition from both cable and local phone companies.

Malone and Hindery painted a scenario for using cable wires as a pathway for AT&T; into American homes, bypassing the local bottleneck and providing a two-way high-speed pipe for a bundle of services on one simplified bill, for long distance, cellular and local telephone calling, TV and Internet access.

Using TCI’s tentacles through the industry, they promised that AT&T; would be able to piece together partnerships with cable operators nationwide to create the first national brand for local phone since the 1984 breakup of Ma Bell.

But the cost of upgrading TCI’s systems for phone and Internet transport turned out to be costlier than AT&T; first predicted. A bidding war when it bought MediaOne and an open-access fight led by America Online delayed the signing up of cable partners for launching local phone.

Most disruptive, the growth of these new revenue streams has not offset the faster-than-expected erosion of the long distance business. Neither has Armstrong been able to staunch the historic outflow of the best and the brightest. A treasure trove of management talent has rushed out the door.

Though TCI had a horrendous reputation for customer service and quality, even the company’s critics say AT&T; made a grave mistake in driving out the bulk of Malone’s executive work force, leaving few people in the field with deep operating experience. TCI employees say they were treated like lepers by AT&T; managers, who replaced them wherever possible with MediaOne personnel, who came from a similar phone culture under previous owner US West.

Perhaps what stung Malone most was when AT&T; sold TCI’s headquarters without first telling him. Malone had designed the new home base, near Denver, as a two-story doughnut shape to promote more mingling and dialogue than occurred at the previous high-rise. The company moved into the building in May, two months after the AT&T; purchase closed. Hindery commissioned a portrait of Malone and his mentor, TCI founder Bob Magness, a father figure who had died in 1996,with an unveiling ceremony last September that moved the steely Malone to tears.