Bid Is Blow to CEO’s Rescue Plan
When AT&T; Corp. named C. Michael Armstrong chief executive in late 1997, board members hailed the selection as “a perfect match” and a choice that would ensure the phone company’s “continuing leadership in this dynamic industry well into the next century.”
Today, a mere 3 1/2 years later, Armstrong instead seems destined to preside over the potential demise of the once-proud telecommunications giant.
The unsolicited bid from cable rival Comcast Corp., which Sunday said it wants to buy AT&T;’s vast cable holdings for an estimated $41 billion in stock and the assumption of $13.5 billion in debt, is just an opening salvo. Analysts say Armstrong will have little choice but to sell the cable unit--and probably sell off the remaining pieces too: consumer long-distance and its business services group.
“This Comcast bid has the practical effect of being a no-confidence vote for AT&T;’s management,” said Scott Cleland of the Precursor Group research firm. “Armstrong may control the timing and the price, but unless he can get his stock price up big-time, fast, Comcast or another cable company will take over.”
It wasn’t supposed to be this way.
After a turbulent run with Armstrong’s predecessor, Robert Allen, more than a few shareholders thought the new chief had the drive and decisiveness to return AT&T; to glory.
Armstrong arrived at AT&T; after a solid career at Hughes Electronics Corp., where he was chairman and CEO for nearly four years.
Before Hughes, Armstrong, a former member of the Times Mirror board, spent 31 years at IBM Corp. in various management positions. He was selected by an AT&T; search committee to replace Allen, and he took the top job Nov. 1, 1997.
His honeymoon at the company was brief. Top executives began to flee because of Armstrong’s harsh and autocratic style, according to former executives.
But few found fault with Armstrong’s vision of how to save AT&T.; He wanted to create a one-stop shop that could sell consumers complete packages of communications services, including cable television, telephone, Internet access and mobile phone service.
Armstrong pushed his strategy for three years, urging investors to be patient as he proceeded with a $100-billion buying spree of cable television companies.
Shareholders eventually lost faith. Profits plunged last year as the cable operations needed heavy capital investment and returned meager operating margins. The company’s longtime cash cow, consumer long-distance, has suffered through declining revenues.
Armstrong reacted by crafting a new strategy--almost a reversal of his old approach. This time, he proposed breaking the ailing phone giant into pieces.
Under that plan, announced late last year, AT&T; would be split into three parts with four separate stocks.
The company would create a tracking stock for its broadband unit and then spin it off completely. The company’s corporate services business and flagship consumer long-distance business would remain together in one company, but with the long-distance unit traded through a separate tracking stock.
The company’s wireless business, AT&T; Wireless Group, was converted from a tracking stock into a separate company as of Monday and now trades under the symbol AWE.
Armstrong presented the plan as a way for shareholders to recoup the millions of dollars in losses they have sustained, as the company’s treasured stock lost nearly half its value in the last year, falling to its current price of $18.70.
The assumption was that shareholders would gain more by taking a piece of each unit than by holding on to the shares of the troubled conglomerate.
Jeffrey E. Heil, head of equity investments for the University of California, has met with Armstrong several times over the years and describes him as “fairly inspirational” and “a better-than-average manager in terms of thinking strategically and having goals.”
But things had changed by the time Armstrong came calling to tout his new breakup plan.
“That was probably his weakest moment. His spin was: ‘We’re not breaking up completely because we have operating agreements’ ” among the new AT&T; units, Heil said. “To me, that sounded like a pipe dream.”
Later, Armstrong also cut AT&T;’s dividend, which had been an investment certainty for more than a century.
“It had to be a tough job for anyone who came into AT&T; . . . but there’s been no benefits for the shareholders,” said Ann Miletti, associate portfolio manager at Strong Capital Management, which owns more than 1 million AT&T; shares. “You haven’t seen any great rewards either out of the operating results or through the stock price.”
Some analysts said the Comcast bid signals the collapse of Armstrong’s vision for the future.
“The deal really does shoot his legacy out the window,” Miletti said. “He was the big believer that they needed the cable assets.”
Armstrong has said the company’s cable business is not for sale and that he remains committed to breaking up AT&T.;
While few are ready to blame only Armstrong for AT&T;’s predicament, many say the once-promising chairman made things worse.
“When he took over, Armstrong was given an enormous war chest, a strong balance sheet and three or four years to get ready for the onslaught from the [Baby Bells moving into long-distance], so it wasn’t like he didn’t have the resources,” said Cleland of the Precursor Group. “Armstrong bet the farm by buying Tele-Communications Inc. and MediaOne, and it didn’t work.”
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Times staff writer Michael Hiltzik contributed to this report.
