Last Updated: May 31, 2000
Printer-friendly version
If Directors Pick an Outsider The Company May Lose Its Popular Mr. Inside
- Hughes Chief in One Scenario
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.
October 13, 1997
NEW YORK -- Picking a new pope may be easier than this.
As AT&T Corp.'s hunt for a new chief executive drags on into its
third month, company directors face an especially difficult choice. If
they pick Mr. Inside, the untested Vice Chairman John D. Zeglis, they risk
inciting the wrath of some big shareholders who see the brainy lawyer as
merely an extension of AT&T's embattled chairman, Robert E. Allen.
But if they go outside and tap a superstar, they could lose Mr. Zeglis
and possibly a cadre of AT&T senior executives who support him. TD
Mr. Zeglis, a veteran AT&T lawyer who helped devise the breakup of
the old American Telephone & Telegraph Co. nearly 14 years ago, has
let it be known he might walk if he gets passed over for the top job. He
has never run a business before, but many AT&T senior executives would
rather work for him than take their chances with a stranger; directors
fret some of those executives would quit with him.
The AT&T directors could reach a Solomonic solution as early as
this week that could keep Mr. Zeglis and yet bring in an outsider. In one
particularly startling scenario, a few directors recently discussed tapping
C. Michael Armstrong and, if necessary to land him, making a multibillion-dollar
bid for the company he runs -- satellite giant Hughes Electronics Corp.,
a unit of General Motors Corp. In the process AT&T would get not only
great technology but a thriving satellite-TV business in which AT&T
already owns a stake. Some AT&T directors believe the Hughes CEO, who
turns 59 this week, could lead AT&T as its new chairman and CEO with
the hope that Mr. Zeglis, 50, would stick around as heir apparent.
A potential Hughes purchase has gotten some support from AT&T Director
Thomas Wyman, who is also a director of GM and its Hughes unit, according
to one person close to the search. Mr. Wyman won't comment. But Mr. Allen
opposes the plan. He rejected Mr. Armstrong for the job once before and
doesn't want to be overruled by his board. Moreover, handing the company
to Mr. Allen's longtime lieutenant, Mr. Zeglis, would mark a more graceful
exit for the AT&T chairman.
In another scenario, which could actually be the easier path, Mr. Allen
is advocating that AT&T's directors recruit an elder statesman CEO
who could act as a caretaker while Mr. Zeglis would serve an apprenticeship
in the No. 2 role. Mr. Allen wouldn't comment for this article.
Directors were still wrestling with the conundrum over the weekend.
Clearly they must act soon. AT&T has seemed paralyzed in the meantime,
unable to wage a bold counterstrike just when there is turmoil in the telecommunications
industry. The company's No. 1 share of the long-distance market, slipping
for a decade, could slide even more sharply if the Baby Bells gain entry
into the business in the next year or two. Two weeks ago, WorldCom Inc.
launched an unsolicited $30 billion bid to acquire AT&T's biggest rival,
MCI Communications Corp.
News reports immediately had AT&T talking to GTE Corp. about a merger.
But executives close to AT&T and GTE say the reports simply aren't
true. While the two telecom giants briefly discussed joining forces a few
months ago, the WorldCom surprise didn't prompt AT&T to reignite the
talks -- in part because the board collectively has been reluctant to dictate
any major new course before deciding who will be in charge of pursuing
it.
"They are afraid to approve a new strategy for AT&T, whether it
be a merger or a new marketing alliance, because they don't know yet who
the leader is," says one person close to the search. "If the directors
choose an outsider, they don't want to stick the new guy with a plan he
didn't devise."
Their caution may be understandable; AT&T's board has been burned
twice in trying to select a leader to guide this $52 billion-a-year behemoth
into the 21st century. Among the twists in this prime-time telecom soap,
"Search for Tomorrow's CEO":
Oct. 12, 1995: AT&T's board anoints insider Alex J. Mandl as president
and heir apparent to succeed Mr. Allen -- eventually. Ten months later
(Aug. 19, 1996), Mr. Mandl tires of waiting and unexpectedly quits to join
a telecom start-up. Two months later (Oct. 23, 1996), John R. Walter, the
little-known chief of printing company R.R. Donnelley & Sons Co., is
the surprise pick as president, with the promise of rising to chief executive
in a little over a year. But things sour in eight months as Mr. Zeglis
is promoted to vice chairman (June 19, 1997). Four weeks pass -- and on
July 16, Mr. Walter quits after the AT&T board balks at keeping its
promise to make him CEO.
That last untimely exit was an embarrassing blow to AT&T, and even
more so for Mr. Allen, who is 62 years old. He had personally led the search,
interviewing candidates and selecting just one -- Mr. Walter -- to present
to the AT&T board. Chastened, Mr. Allen has been reduced to a role
of advising from the sidelines as two AT&T directors, textiles executive
Walter Elisha and former CBS Inc. Chairman Mr. Wyman, control the quest
for a successor he had hoped to pick.
On the morning Mr. Walter resigned, AT&T's board bypassed Mr. Allen
to ask Messrs. Wyman and Elisha to form a search committee to find a new
CEO. Later that afternoon Mr. Elisha, chief executive of Springs Industries
Inc., talked by phone with headhunter Thomas Neff of Spencer Stuart. The
firm had worked on the search that produced Mr. Walter a year earlier.
Soon Mr. Neff presented the committee with the short-list of other candidates
from that first go-round.
The directors were impressed with the top-notch prospects on the list,
which included Mr. Armstrong, head of GM's Hughes Electronics unit, and
Richard Brown, a former Bell executive who is CEO of Britain's Cable &
Wireless PLC. Some directors were miffed that Mr. Allen hadn't bothered
to recommend them, according to people close to the matter.
So began another episode of this search saga. Messrs. Elisha and Wyman
ordered Mr. Neff, the headhunter, and rival recruiter Gerry Roche of Heidrick
& Struggles to find out whether any of the prospects were still available.
They started background checks, and by late last month they narrowed the
list to a few executives, including Messrs. Armstrong and Brown. The two
headhunters also began preparing separate assessments of Mr. Zeglis, AT&T's
only internal candidate, after interviewing him in late August.
Along the way, AT&T's board has kept one eye on the finalists and
the other on the company's stock price, wary that a wrong move will add
to the stock's woes. The directors were high on Mr. Zeglis, confident he
has the talent to guide AT&T through the arcane rules that govern the
newly deregulated telecom market. But they also worried about picking a
man viewed by many on Wall Street as Mr. Allen's aide-de-camp.
"Directors feared that the investment community would throw stones if
they picked Zeglis," says one executive involved in the matter. Mr. Zeglis's
prospects improved a bit after The Wall Street Journal reported on Aug.
29 that the Allen confidante had emerged as a front-runner for the top
job; AT&T stock held its own.
Mr. Zeglis helped himself a few weeks later, when directors took his
measure as he presented a new strategic initiative at a gathering of the
board and senior executives at the plush Greenbriar resort in West Virginia
on Sept. 19.
Mr. Zeglis's Greenbriar pitch included a bold plan to franchise the
AT&T name to other carriers. He also briefed the directors on the strengths
and weaknesses of possibly merging with any one of several potential candidates,
including GTE, Cable & Wireless and BellSouth. He declined to comment
for this article, but the lawyer-turned-operator has other plans in store:
a global Internet play with Microsoft Corp. or another major partner, and
the possible sale of financial stakes in AT&T's network to the Baby
Bells and other players, risking easing their way into AT&T's long-distance
market in exchange for their capital and their help in letting AT&T
offer rival local services.
But the board reserved judgment on whether to approve Mr. Zeglis's ambitious
blueprint for the same reason many big decisions are on ice at AT&T
these days: They hadn't yet decided on a new CEO.
Still, AT&T's stock price rose more than $2 a share in three days
after Mr. Zeglis's franchising strategy drew headlines, and his own stock
with the board rose accordingly. As the Greenbriar confab ended that weekend,
directors agreed privately that they must find a way to retain Mr. Zeglis.
Yet they still worried about his lack of operating experience, a critical
point given the vastness of AT&T and the impressive combat records
logged by a few outsiders under consideration for the top job.
The searchers took a hard look at those outsiders last month. A small
contingent of headhunters and directors flew to London to meet with Mr.
Brown of Cable & Wireless. They came away believing that he would be
a strong prospect to run AT&T, based on his years as a top executive
at the Chicago-based Bell, Ameritech Corp., and his CEO credentials since
then in turning around C&W.
The drawback: Mr. Brown is 50, about the same age as Mr. Zeglis, which
would leave little room for the AT&T insider to ascend to the starring
role as long as Mr. Brown is running the show. But two weeks ago, AT&T's
directors learned they won't have to worry about it after all: Mr. Brown
took himself out of the running and signed a new employment contract to
run Cable & Wireless for another three years, according to people close
to Mr. Brown. C&W's CEO declines to comment.
The search focused more intensely on Hughes's highly regarded chief,
Mike Armstrong. Mr. Armstrong had been down this path before, in the summer
of 1996, when AT&T's Mr. Allen had interviewed him for the job of president.
But the personal chemistry between the two men was bad. And it wasn't helped
when the Hughes chief bluntly told his AT&T counterpart that he wouldn't
take the job unless Mr. Allen agreed to step down as CEO a few months after
Mr. Armstrong arrived. Mr. Allen never passed that exchange on to his board,
and some directors are hopeful a better result might emerge this time around.
Mr. Armstrong's older age might let AT&T's directors hold out the
promise that Mr. Zeglis could eventually succeed the new hire after spending
a few years in an apprenticeship. But by late last month, Mr. Armstrong's
candidacy was clouded by other factors. Lately he has been busy restructuring
Hughes and spinning off its multibillion-dollar defense business to Raytheon
Co. Next month he is scheduled to begin a road show to pitch the newly
restructured Hughes, now in the satellite and telecommunications businesses,
to institutional investors. This would make it difficult for Mr. Armstrong
to just up and leave, and it is why some AT&T directors have talked
about making a bid for Hughes.
"It's much more complicated this time," Mr. Armstrong told an associate
in describing the latest AT&T approach. The Hughes head declined to
be interviewed for this article.
Even some of the people who are intimately familiar with the search
are unsure of which course AT&T's board will take. The directors may
yet arrive at a "power sharing" solution aimed at pleasing as many sides
as possible. They could hold off on making Mr. Zeglis chief executive for
now, in favor of an "elder statesman" who would serve in a caretaker role
for two years or less while Mr. Zeglis cuts his teeth running operations.
That approach worked especially well at AT&T's equipment spinoff,
Lucent Technologies Inc. Mr. Allen tapped AT&T board member Henry Schacht,
former chairman of Cummins Engine Co., to run Lucent as chairman and CEO
and named the unit's chief, Richard A. McGinn, as president and heir apparent.
Lucent has since done very well as a public company, and last week Mr.
McGinn ascended to CEO as planned.
Mr. Schacht now would be free to serve in a similar role at AT&T,
but he has made it clear he isn't interested in doing so. Another possibility
is to name a nonexecutive chairman: Donald Perkins, a former AT&T director
and the retired chairman of Jewel Foods Inc. Mr. Perkins played such a
role at Kmart Corp. after leading an ouster of the company's chief, Joseph
Antonini, a few years ago. But Mr. Perkins has let associates know he wouldn't
want the AT&T assignment.
The former CBS chief, Mr. Wyman, has lobbied to have himself appointed
nonexecutive chairman, but his fellow AT&T directors haven't shown
much enthusiasm for the proposition. Unknown to Mr. Allen, Mr. Wyman tried
much the same maneuver a year ago when he interviewed Mr. Walter for the
job. But Mr. Walter brushed off the suggestion, knowledgeable observers
say. He won't give interviews.
Until the board decides, the intrigue continues -- as does the uncertainty
for AT&T's future course. For now, says one person privy to the matter,
AT&T "is like an unguided missile with no one to direct where to strike.
Or when."
