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Hughes's
Armstrong Is CEO And Zeglis Is President; Allen Is Very Lame Duck - Losing
the Faith of a Friend
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 20, 1997
NEW YORK - Ma Bell, in distress and facing the fight of her life, finally
has a new leader: C. Michael Armstrong.
AT&T Corp.'s directors may announce their choice of Mr. Armstrong,
the chairman and chief executive of Hughes Electronics Corp., as early
as today. That would wrap up an intensive three-month search that has ended
as it began, with a big jolt of surprise: The board has decided that Robert
E. Allen, 62 years old, will resign within weeks as chairman, CEO and a
director after a 40-year career at AT&T. TD It is a dramatic denouement
to Mr. Allen's stormy nine-year reign atop AT&T, a period of unprecedented
tumult in the telecommunications industry and, even more so, at AT&T
itself. Its directors were long criticized as one of the most passive boards
in corporate America. They had unstintingly supported Mr. Allen for years
as he eliminated more than 100,000 jobs, incurred billions of dollars in
losses in a disastrous misadventure into computers, and ultimately split
the company into three, stripping AT&T of deep management talent and
some of its greatest assets, including Bell Laboratories.
That isn't to say Mr. Allen didn't produce some wins. The 1995 three-way
breakup freed AT&T's equipment business, Lucent Technologies Inc.,
which since has been a stellar performer and a hot stock. AT&T also
expanded aggressively in wireless services on his watch. And the job cuts,
though painful, were necessary: AT&T simply was too fat.
The board forgave myriad miscues but lost patience in the end, prodded
by some newer members less loyal to Mr. Allen and by one final humiliation:
Mr. Allen's engineering the ouster of his own chosen successor, John R.
Walter, whose surprise resignation as AT&T president in July kicked
off this extraordinary search.
Mr. Allen had opposed the selection of Mr. Armstrong, 59, whom he could
have hired a year ago but refused to because of the Hughes chief's insistence
that Mr. Allen step aside within a few months. The AT&T chief had hoped
to salvage his legacy and hand the CEO job to his confidante and general
counsel, Vice Chairman John D. Zeglis. The board will meet him only halfway
on that score. Trying to keep Mr. Zeglis, 50, on board, they are promoting
him to president and chief operating officer and tacitly assuring him he
will succeed Mr. Armstrong as chairman and CEO in three years. Messrs.
Allen, Armstrong and Zeglis wouldn't comment for this article.
The board thus has paired a new chief from outside AT&T with his
main rival for the top job. How the two men get along -- and whether AT&T
can quell the past year of soap-opera dramatics and return to the orderly
transition of power that had long been its history -- will be worth watching.
Mr. Armstrong would be the first outsider to lead AT&T, one of the
nation's oldest and most revered corporations, since financier J.P. Morgan
installed visionary Theodore N. Vail in the top job at the turn of the
century. By now, Mr. Armstrong is accustomed to the outsider role. He joined
Hughes as CEO in 1992 over the heads of many inside candidates, and he
confronted resentment in the executive suite by stroking the egos of those
who played along -- and throwing out those who didn't.
At AT&T, Mr. Armstrong must quickly decide whether to wade into
the $30 billion takeover battle raging for the company's biggest rival,
MCI Communications Corp. Should he try to buy one of the bidders -- WorldCom
Inc. or GTE Corp. -- or perhaps counter by coupling up with a Baby Bell
such as SBC Communications Inc., the Texas suitor AT&T had courted
a few months ago? Less pressing is whether to make a bid for Hughes in
the future as a few AT&T directors had discussed, now that they have
hired Mr. Armstrong without having to do so.
Mr. Armstrong also must chart a strategy for staving off declines in
long distance, reviving flagging fortunes in local service and on the Internet
and shoring up senior-management talent.
Some of these problems must seem eerily familiar to Mr. Armstrong, who
once harbored CEO ambitions at a once-fading giant: IBM. He had spent 31
years at International Business Machines Corp. but left to lead Hughes,
a unit of General Motors Corp. IBM went on to regain a solid financial
footing under the helm of another outside superstar, Louis V. Gerstner
Jr.
Mr. Allen closes out his career on a sadder note. He entered the old
American Telephone & Telegraph Co. in the spring of 1957, fresh out
of Indiana's tiny Wabash College. He started out as one of more than a
million rank-and-file employees of American Telephone & Telegraph and
rose to CEO. A quiet loner and obsessive golfer, he had once hoped to stick
around until age 65. He reluctantly agreed to shorten his tenure by two
years to bring in Mr. Walter. Now he is leaving even earlier than that
-- and not entirely by his own choice.
The seeds of that humbling exit were planted four weeks ago in a weekend
showdown between Mr. Allen and his directors at the Greenbrier resort in
West Virginia. AT&T has for many years held annual gatherings for senior
management at the Greenbrier, a plush retreat that counts among its features
a hardened bomb shelter constructed at the height of the Cold War to protect
Congress in the event of a nuclear attack.
On that weekend, Mr. Allen ultimately lost the faith of his biggest
supporter and friend on the board, Walter Elisha, chairman of Springs Industries
Inc. Mr. Elisha steadfastly defended Mr. Allen's much-criticized tenure
as recently as two months ago. But that seemed to change at the Greenbrier,
as Mr. Elisha mulled matters with board members, people close to the situation
say. After briefly reviewing strategy on a Sunday afternoon, directors
asked Mr. Allen to leave the room so they could discuss succession plans.
The AT&T chairman apparently hadn't expected to be cut out of the
deliberations, and he angrily decided against waiting around. Shaken, he
stormed out of the room and commandeered an AT&T van, one of several
waiting to take directors back to their private jets. He ordered the driver
to take him to the Greenbrier Valley Airport in nearby Lewisburg, W.Va.,
and the AT&T jet, leaving others to find their own way home.
An AT&T spokeswoman calls this version of events "ridiculous" and
insists the meeting was "very cordial and went exactly as planned."
Meanwhile, the directors reflected on Mr. Allen's nine-year tenure and
built a case against him rather quickly. The meeting took on the pall of
a funeral they solemnly discussed the Allen years, according to people
familiar with the meeting. Mr. Elisha, through the AT&T spokeswoman,
says Mr. Allen's "performance wasn't evaluated; there wasn't a review of
the Allen years."
Another person familiar with the session, however, says directors slowly
went around the room asking for one another's views. In the end, the newest
board members -- including George Fisher, chairman of Eastman Kodak Co.,
Kenneth Derr, CEO of Chevron Corp. and Ralph Larsen, CEO of Johnson &
Johnson -- said Mr. Allen had to go and relinquish his board seat to make
way for a new leader.
Mr. Elisha, head of the search committee, and director Thomas Wyman,
the former CBS Inc. CEO, began the discussion by retracing Mr. Allen's
ascension and how he had been groomed for the top job, according to knowledgeable
executives. The recap began with 1983, when then-CEO Charles L. Brown picked
Mr. Allen, who was president of the Bell company in the Chesapeake Bay
area, to be AT&T's chief financial officer. He quickly rose to No.
2 under the next CEO, James Olson -- and suddenly became chairman when
Mr. Olson died of a heart attack in May 1988.
Mr. Allen lacked technical training but soon took aim at a technical
industry -- computers -- by mounting a hostile $7.4 billion bid for NCR
Corp. in 1991. AT&T eventually ran up losses of about $10 billion on
its computer efforts. Mr. Allen ultimately spun off NCR in the three-way
split.
AT&T wouldn't comment on the Greenbrier meeting or the deliberations
of its directors. But people familiar with the meeting say directors concluded
the NCR debacle was one of Mr. Allen's major failings, not only because
he didn't deliver on AT&T's primary growth strategy for the 1980s and
beyond, but also because he let the core services business flounder from
inattention and inadequate investment. As he poured billions into NCR --
siphoning off money from the cash-cow long-distance business -- he ignored
pleas from his senior team to move into the hot area of wireless services.
He only belatedly agreed to have AT&T acquire cellular giant McCaw
Cellular Communications Inc.
Mr. Allen also presided over a brain drain, directors at the Greenbrier
noted. NCR's senior team quit soon after the takeover and was replaced
by AT&T executives who also left as NCR and Lucent Technologies Inc.,
the equipment unit, were spun off. Almost all of McCaw's original senior
team quit, including founder Craig McCaw; former President James Barksdale,
who now runs Internet-software pioneer Netscape Communications Corp.; Wayne
Perry, a wireless dealmaker of the first rank, and Mr. Barksdale's energetic
successor, Steven Hooper.
In addition, though others had brought Mr. Allen along, Mr. Allen didn't
do the same, never grooming a strong No. 2 to succeed him. For eight years
as CEO he refused to share power or mentor a No. 2. His de facto second-in-command,
global-operations chief Victor Pelson, quit in 1995 after suffering a mild
heart attack.
In October 1995, Mr. Allen named a president, insider Alex J. Mandl,
but by the next spring Mr. Allen began to tell people he intended to stay
as CEO for another three years. Rather than wait, Mr. Mandl quit in August
1996 to take a $20 million offer from Associated Communications Inc., a
wireless company, to run its new wireless local-phone business.
Mr. Mandl's departure angered some directors who had hoped that AT&T
finally had a succession plan. They urged Mr. Allen to find a No. 2 and
heir. A search began, and AT&T soon had the chance to hire Mr. Armstrong
until Mr. Allen stepped in.
The opportunity presented itself in August of last year. Mr. Armstrong
got a call from two recruiters hired by Mr. Allen, Dennis Carey and Thomas
Neff of the recruiting firm Spencer Stuart, according to people close to
Hughes. The headhunters knew Mr. Armstrong had quickly turned a low-key
supplier of satellite gear and defense systems into a satellite powerhouse
with a thriving new consumer business, beaming hundreds of channels of
crystal-clear digital pictures and sound to home-satellite dishes. Even
stodgy AT&T had purchased a stake in Mr. Armstrong's impressive new
DirecTV satellite service.
Intrigued by the AT&T overture, the Hughes chief told the recruiters
he would be interested in talking about the job -- but only if Mr. Allen
would agree up-front that any deal would entail AT&T's CEO leaving
immediately, said a person close to Hughes. Mr. Allen agreed to meet with
Mr. Armstrong about a week later at New York's swank Four Seasons Hotel.
It was their first face-off.
There, Mr. Armstrong talked about his tenure at Hughes and what he might
bring to AT&T. Mr. Allen sat silently through most of the meeting but
agreed to talk again with Mr. Armstrong at a later date, one Hughes insider
says.
A few days later, Mr. Allen told the recruiters: No deal. He wouldn't
leave immediately. Mr. Armstrong sent word back that this would be acceptable:
"I'll give him three months while I go around, tour AT&T offices and
meet AT&T people, but after that I take over." Mr. Allen never responded.
"He just kept Mike hanging," the Hughes insider recalls.
Even more damaging, perhaps, Mr. Allen never mentioned the possibility
of landing Mr. Armstrong to the AT&T board. This lapse was still a
touchy subject as the directors discussed the succession last month at
the Greenbrier.
Instead, Mr. Allen brought them Mr. Walter, the CEO of printing leader
R.R. Donnelley & Sons Co. Mr. Walter was a hit with directors, who
unanimously affirmed the choice. They promised the new hire that he would
rise to CEO by January 1998. But analysts bashed the choice.
Eight months later Mr. Walter quit after behind-the-scenes lobbying
by Mr. Allen to deny him the CEO's job. Mr. Elisha, ever loyal to Mr. Allen,
unceremoniously branded Mr. Walter as lacking the "intellectual leadership"
to run AT&T.
But Mr. Elisha and other directors decided they had to take control
of the search this time. Mr. Armstrong's name soon emerged on the short-list,
just as it had the first time around. This time the board didn't hesitate:
If a deal worked out with the Hughes chief, he would enter as chairman
and CEO "from day one," an associate says. Mr. Armstrong, who a year earlier
had said Mr. Allen could stay on for a few months, made much the same demand
this month.
The AT&T board set just one condition: Mr. Armstrong would have
to keep Mr. Zeglis as his No. 2 and agree to make the AT&T lawyer his
heir apparent. The directors liked Mr. Zeglis for his grasp of industry
issues and his smarts. Though they feared Wall Street would dismiss him
as merely Bob Allen's crony, Mr. Zeglis had shown in the past he was his
own man. He had strongly opposed the NCR deal despite Mr. Allen's pushing
it, and he had pushed to buy McCaw despite Mr. Allen's resistance.
AT&T's board held intense final negotiations with Mr. Armstrong
during the past week, and he came to a final agreement Friday. He and directors
were hammering out minor details of his compensation and relocation package
over the weekend. Mr. Armstrong's three-year AT&T contract could be
worth more than $25 million, including stock options and funds that would
have come to him had he stayed at Hughes, according to one person close
to the situation.
Now Messrs. Armstrong and Zeglis will have to make some big decisions
immediately. Numerous potential deals have passed AT&T by as it searched
for its new leader. It failed to put together a $50 billion merger with
SBC after protests from federal policymakers. Mr. Allen had to rebuff other
potential partners that wanted to talk about a merger -- including local-phone
company GTE and Internet powerhouse WorldCom -- because he was a lame duck.
Since then WorldCom has launched a $30 billion hostile bid for MCI,
trying to wrest it away from its would-be owner British Telecommunications
PLC, while GTE has tried to knock both out of the box with a $28 billion
cash offer for MCI.
If GTE wins MCI, Messrs. Armstrong and Zeglis might have enough political
cover to reignite talks with SBC. Or they could turn their sights on WorldCom,
a less controversial choice because it isn't a Bell that grew out of the
antitrust breakup of the AT&T empire. Getting WorldCom would give AT&T
broad links world-wide into Internet services and in local-phone markets
throughout the U.S.
"SBC and WorldCom are the two companies AT&T is studying most thoroughly
as merger partners," one person close to AT&T says. SBC and WorldCom
won't comment on their merger plans.
Mr. Armstrong might also make a play for his beloved Hughes Electronics,
making AT&T once again the pre-eminent satellite carrier. For now,
GM has made it clear that it isn't willing to sell the unit.
