Last Updated: May 31, 2000
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The Two Never Grew Close, And CEO Began Airing His Concerns to Board - A New, Tougher Job Search
One of five winning entries by John Keller of The Wall Street Journal
that won the Jesse Laventhol prize for deadline reporting by an individual
in 1998.
July 18, 1997
In the end, AT&T Corp.'s new president, a former star salesman,
failed to woo and win over his most important customer: Chairman Robert
E. Allen.
Plucked by Mr. Allen from the obscurity of a printing company and made
heir apparent at one of the world's most powerful corporations, John R.
Walter faced a tough situation from the start. He had to share the executive
suite with a chief executive who had agreed to give up the reins early
in order to land Mr. Walter, but who didn't really want to do so. TD Rather
than cultivate Mr. Allen, Mr. Walter managed to alienate him -- with a
hardball style, concern with image and what the board depicts as an inability
to grasp the complex competitive and regulatory issues roiling the telecommunications
industry and AT&T.
It was a major miscalculation. Mr. Walter underestimated the sway that
Mr. Allen still had with directors. During the past four months, Mr. Allen
delivered tough critiques of his new No. 2 in private discussions with
outside directors, even as he gave little critical feedback to Mr. Walter
himself. By Wednesday, Mr. Allen had convinced the directors that Mr. Walter
lacked the "intellectual leadership" to run AT&T, in the language of
outside director Walter Elisha, who delivered the news to Mr. Walter that
he wouldn't become CEO next year as planned.
In undermining his designated successor, Mr. Allen may, in fact, have
inadvertently hastened his own departure. Mr. Elisha made clear Wednesday
that to recruit a strong Walter successor, the board will have little choice
but to offer the candidate the CEO title from the start. "We are now searching
for a CEO," he said.
Mr. Allen has always found it hard to work with a No. 2. The reason
the job Mr. Walter got was open was that its well-regarded previous occupant,
Alex Mandl, had quit when denied the heir-apparent designation.
Mr. Walter, who is 50 years old, thus came into AT&T under extraordinary
circumstances. The company, lacking enough bench strength, had searched
extensively last fall for a president who would eventually move up. But
marquee names in American business, such as George M.C. Fisher of Eastman
Kodak Co. and James Barksdale of Netscape Communications Corp., wouldn't
consider the job unless they could get the CEO reins immediately. Mr. Walter
agreed to wait a little over a year for them.
To accommodate such an arrangement, Mr. Allen, now 62, reluctantly agreed
to retire two years sooner than he had intended. Even so, Mr. Walter exacted
a lucrative price for coming: a $5 million signing bonus and at least $25
million in severance and potential pay if he didn't ascend to CEO by the
agreedto date of Jan. 1, 1998.
As Mr. Walter's power grew in the company and he garnered increasingly
favorable press coverage, Mr. Allen, whose own reputation had been damaged
by years of bad investments and competitive misfires, is said to have grown
resentful and mistrustful. In private, he would accuse Mr. Walter of missteps
ranging from not backing the chairman's deal strategies to talking with
newspaper reporters. Several executives say Mr. Allen had phone records
checked at the company, looking for any calls that might have been made
on the sly to reporters. AT&T denies this. Neither Mr. Allen nor Mr.
Walter will comment.
The former chairman of R.R. Donnelley & Sons blew into AT&T
like a cool autumn wind last November. Knowing well Mr. Allen's reputation
for being aloof with AT&T employees, middle managers and Wall Street,
the new president played to all three constituencies. He urged the rank
and file to e-mail him about their concerns. He could warmly greet the
lowliest subordinate with an arm around the shoulder. He called the executive
suite in AT&T's plush Basking Ridge, N.J., offices "Carpet Land" and
ordered the executive dining room closed, forcing senior managers to use
the company cafeteria as everyone else did.
He showed little deference to his boss. Although Mr. Allen appeared
to welcome a mentoring role, sometimes commenting that he hoped "my 40
years in the phone industry would be a valuable resource to anyone new
that we bring in," Mr. Walter didn't build many bridges to the old-style,
conservative manager. The two men met infrequently at work and almost never
outside the office.
Mr. Walter didn't help matters when he told The Wall Street Journal
he hadn't joined AT&T "to be No. 2." Privately, he groused about being
called a telecommunications novice and about how the negative reaction
to his inexperience had hurt the stock price. "He'd say, `The problem's
not me, it's Bob,'" one executive says.
Mr. Allen, though, soon began to wonder if the problem wasn't Mr. Walter.
The new president had a stormy showdown in early December with AT&T's
aggressive consumer-services president, Joseph Nacchio, who had been passed
over for the presidency. Mr. Walter said he would transfer Mr. Nacchio
to a new assignment, but Mr. Nacchio had already lined up a new job running
a start-up company, and he quit.
That weekend, however, Mr. Walter told the Journal he had taken Mr.
Nacchio "out of his job." Says one AT&T executive: "Bob felt that was
too harsh. Things just aren't done that way at AT&T."
Later, when AT&T transferred Ron Ponder, the executive in charge
of its beleaguered efforts to build a new national billing system, it was
reported that Mr. Walter had ousted Mr. Ponder. Mr. Allen and other senior
executives "suspected Walter of giving the story to the press," a person
close to AT&T says. Mr. Walter heard of the suspicions and strenuously
denied to associates that he had leaked anything.
Mr. Allen's suspicions aside, it became clear by spring that Mr. Walter
was having an impact on AT&T, its managers and workers. He had named
two senior executives to powerful new positions, including rising star
Gail McGovern, who became head of the $26 billion consumer unit. Mr. Walter
held meetings with middle managers in which he would push them to act like
owners of AT&T. He rewarded those who found ways to cut costs on everything
from real estate to paper clips.
"Senior managers were loving the guy," says Ken McGee, an analyst at
Gartner Group Inc. "I'd never seen AT&T's groups acting so coherently
and singing from the same song sheet as they were this year."
Burnishing his image with investors, Mr. Walter held AT&T's first
meeting in two years with securities analysts, who had all but written
off Mr. Allen for years of management misfires such as the botched takeover
of computer company NCR Corp.
Mr. Allen had won applause for breaking up AT&T last year and spinning
off its equipment businesses, including NCR and the now-highflying Lucent
Technologies Inc. "Bob Allen has done a terrific job," Mr. Elisha said.
But AT&T still faced billions of dollars in spending in numerous sectors,
and morale was still poor after years of downsizing.
With Mr. Allen's credibility at an alltime low with analysts, the job
of delivering tough news to the Street about the spending and earnings
outlook fell to Mr. Walter. Over two days, he and other executives described
in detail the financial hit likely in the next two years as AT&T expanded
into the local-phone market and upgraded its long-distance and wireless
networks. AT&T would spend $9 billion, nearly a third more than last
year, on capital improvements; but it would cut more than $2.5 billion
in costs over that time and strive to deliver annual earnings of $5 to
$6 a share within a few years. Analysts were skeptical that Mr. Walter
could deliver but thankful for the meeting just the same.
Little did they know that Mr. Allen had already begun to write Mr. Walter
off. AT&T had held merger talks with SBC Communications Corp., the
aggressive Bell company in San Antonio, in early 1996, only to have SBC
pull away in disgust over the lack of progress in the talks, according
to executives close to the two companies. Then last winter, AT&T's
new president got a call from SBC Chairman Edward Whitacre, who knew him
well from Mr. Walter's days at Donnelley printing SBC directories. Mr.
Whitacre asked for a meeting to revive merger discussions, and Mr. Walter
agreed.
Although Mr. Walter told Mr. Allen of SBC's renewed interest, Mr. Allen
is said to have been incensed. "Allen was angry that his subordinate got
the first call," says an executive close to AT&T.
The call only seemed to reinforce the chairman's suspicions that Mr.
Walter couldn't be trusted. It also helped to promote the only real competitor
Mr. Walter now had within AT&T for Mr. Allen's seat: John Zeglis, the
50-year-old general counsel and Mr. Allen's closest confidant.
Mr. Zeglis, a quiet lawyer whose involvement at AT&T goes back to
the 1984 Bell System breakup, is as cerebral as Mr. Walter is a salesman.
Mr. Allen came to rely on his acute legal mind. "Zeglis is bright enough
to project forward where the industry is headed and how the complex regulation
will affect AT&T's ability to expand," says an investment banker. "His
brainpower is pure wattage, and he's also affable. Allen loves him."
Mr. Allen took over the SBC talks, pulling in Mr. Zeglis to run the
complex negotiations and figure out how to win over regulators to such
a controversial deal.
Mr. Walter was kept on the periphery. And it was agreed SBC's Mr. Whitacre
would take command of the combined company, leaving Mr. Walter without
a job and allowing Mr. Allen to stay on for the possibly two years it would
take to complete the complex merger.
Mr. Allen, who never publicly acknowledged the talks even though he
lobbied for the right to do such a merger, hoped to put together a deal
with the large Bell company to jump-start his own flagging efforts in local
phone service. He also saw a merger as a way to neutralize a Bell threat
to AT&T's long-distance business.
Bell companies and GTE Corp., which control eight U.S. local-phone regions,
aim to beat AT&T in the long-distance market. While GTE is already
in the game, the Bells are awaiting a regulatory green light. By combining
with SBC, which has a lock on the two Bell territories in the Southwest
and California-Nevada, Mr. Allen could effectively take AT&T out of
two fronts in the eight-front war and use SBC to help fund AT&T's push
into local territories elsewhere.
But Messrs. Allen and Zeglis never got a chance to sell regulators on
their deal. News of the talks surfaced in The Wall Street Journal in late
May, fouling Mr. Allen's plan. He suspected Mr. Walter of leaking news
of the merger to the Journal. Mr. Walter denied the accusation, but Mr.
Allen remained unconvinced.
Mr. Allen had already begun to critique Mr. Walter's performance to
directors, Mr. Elisha confirmed in an interview Wednesday. Between April
and this week, Mr. Allen held numerous private sessions with Mr. Elisha
and other outside directors, saying he was concerned that Mr. Walter wasn't
focusing enough on the details of regulation, an important factor in AT&T's
business.
Other senior managers had approached Mr. Allen privately about some
concerns they had with the president, say people close to AT&T. They
said he had angered executives in AT&T's wireless unit in Seattle by
acting uninterested in its technology and taking a hard line on its spending.
"People questioned whether he really understood the technology and how
important it was for us to use it to fight the Bells, since it was so hard
to use the Bells' own local phone lines," one executive close to AT&T
says.
Several of the wireless business's senior managers have since quit,
including Wayne Perry, the well-regarded vice chairman, who directed AT&T's
bidding recently for $2 billion in wireless licenses.
Outside directors also did their own homework. Mr. Elisha said they
began interviewing senior managers regarding Mr. Walter. The managers'
input, Mr. Elisha said without elaborating, helped the board decide finally
not to make Mr. Walter AT&T's next CEO. Mr. Elisha told Mr. Walter
of the decision Wednesday morning in a 90-minute session during which Mr.
Walter ticked off what he felt were his numerous accomplishments at AT&T.
Mr. Walter then resigned and worked with AT&T to put out a news release.
It quoted him as saying, "I believe I am perfectly qualified to be CEO
of AT&T right now." But Mr. Elisha and the other directors had concluded
otherwise. "He underestimated the complexity of AT&T and the difficulty
of making an impact on the organization," Mr. Elisha said.
With AT&T now needing more than ever to recruit a dynamic CEO, Mr.
Allen may have written the last chapter of his own tenure. But one way
AT&T could find his successor would be through a Bell merger such as
the failed SBC deal. There are rumors that AT&T has been drawing up
studies of possible mergers with several other companies; how far along
any such deal might be is unknown.
In the meantime, outside directors have taken command of the new search.
While Mr. Allen will have input, Mr. Elisha said, the board will find the
new CEO. Kodak's Mr. Fisher, who is an AT&T director, is a strong candidate,
although lately he has been having his own problems at Kodak, whose earnings
are dropping as it comes under increasing fire from aggressive Fuji of
Japan and Hewlett-Packard Co. in digital photography.
There is also Mr. Zeglis, who for the past couple of years has told
AT&T executives that he has no interest in running a company, even
as he has strived to make himself indispensable to the chairman. Mr. Zeglis,
who recently added the title of vice chairman, has never run a business,
but on Wednesday he was put in command of AT&T's operations world-wide.
It will take some time before he or any candidate can restore the power
that was once AT&T. "Walter was supposed to save AT&T," says Scott
Cleland, director at Legg Mason Precursor Group, an adviser to big institutional
investors. "Every time AT&T takes one step forward, it takes two steps
back. This is a major oops."
