Bid for AT&T Cable Presents Armstrong With Tough Choice
By DEBORAH SOLOMON and NIKHIL DEOGUN
Staff Reporters of THE WALL STREET JOURNAL
Tech Center
July 13, 2001
These are trying times for C. Michael Armstrong. The AT&T Corp. chairman had been working for months to convince investors that his plan to break the struggling phone giant into four parts was the right choice. Now, he has to decide whether selling one of those parts may make even more sense, and, if so, at what price.
Investors already seem to have voted: Since Comcast Corp. announced its unsolicited bid Sunday to buy AT&T's cable-TV systems for $41 billion, AT&T's stock has climbed by nearly $16 billion overall.
Creating such "value" for AT&T's parts is what Mr. Armstrong has been pushing for since he announced his breakup plan last fall. It's just not happening in the manner he expected.
In an interview Thursday, the embattled chief executive said it "kind of hurts my feelings" that Wall Street didn't believe the value of the sum of the parts until AT&T received the so-called bear-hug bid for the cable business.
In fact, very little of Mr. Armstrong's tenure has turned out the way he envisioned when he joined AT&T three years ago. Then, the former head of General Motors Corp.'s Hughes Electronics unit marched in with a vision of recreating the Bell System of old. He spent more than $100 billion in stock and cash, snapping up cable-TV networks to use as the first AT&T-controlled conduit into American homes since its earlier breakup of 1984. Through these high-capacity pipes he planned to offer local and long-distance phone calling, high-speed Internet access and hundreds of TV channels.
But beefing up those lines for such services took far longer and cost far more than Wall Street could stomach. In the meantime, the cable business -- which was eventually supposed to make up for AT&T's declining long-distance revenue -- has turned into the least profitable unit of the company. In 2000, AT&T Broadband, as the operation is called, posted a loss of $5.4 billion.
That led to Mr. Armstrong's announcement that he would break apart the company's wireless, cable, consumer-phone and business-telecom operations into separate units, most of which would eventually become free-standing companies. The decision was roundly criticized by investors, who considered it a complete reversal of his initial strategy.
Now, with Comcast offering less for AT&T's cable systems than AT&T paid for and invested in them, shareholders and industry watchers are once again questioning Mr. Armstrong's skills and the legacy he will leave behind.
"Mike Armstrong is a very credible, convincing individual, but the problem is his strategy didn't pan out the way he thought," said Brian Adamik, an analyst with Yankee Group, a telecom consulting firm in Boston.
Through it all, the ebullient Mr. Armstrong has remained optimistic. He held his head high while AT&T's stock fell, key executives quit and some investors called for his departure.
He insists that what he has done is nothing short of remarkable and points to AT&T Wireless as a positive mark of his tenure. On Monday, the cellular unit was split off from AT&T, and investors have given it a market capitalization of about $42 billion.
"What I started out to do was to recreate AT&T and in doing that, I set out against time, which was my enemy," he said. In the past three years, he said, he has transformed three networks -- cable, wireless and the traditional wireline -- to handle new services and more customers.
"Certainly, some wonder whether we'll deliver the value of this strategy," Mr. Armstrong said. But he says he is convinced that his plan will boost shareholder value. "The first legacy of that strategy is wireless," he said. "Business services, consumer and broadband will fulfill the same potential."
Mr. Armstrong may view his shareholders' reaction to Comcast's offer as validation of his breakup decision. But that recognition could ultimately cost him the prized cable-TV assets -- and his chance to run the operation, as was his hope, post-breakup. But if he doesn't reach agreement with Comcast or another company on a cable deal, he risks the wrath of shareholders who have been pushing for such a union.
Mr. Armstrong said he has fielded "phone calls about the current situation" from other companies. He declined to say whether these companies had expressed an interest in submitting a bid. For now, AT&T is going ahead with its earlier plan to mail proxies to win shareholder approval to create a tracking stock for the cable unit.
Comcast President Brian Roberts, responding Thursday to Mr. Armstrong's plan to continue with the tracking stock, said, "We hope and expect in the end that Mike and the board will do what Mike said yesterday, and that is that is to consider our offer seriously."
That said, the AT&T CEO said he isn't philosophically opposed to combining AT&T Broadband with another company, even before the cable division is separated into a tracking stock. But he said any deal would be predicated on three things: The strength of the bidding company, the value offered and the governance structure of the combined entity.
"Do I think that continuing to participate in industry consolidation to greater critical mass is a smart thing and builds on the strategy that we have laid out? Yes, I do," he said.
He'd also like to be a part of his cable empire's future, according to people familiar with the situation. This much became clear in the talks between Comcast and AT&T executives that led up to Comcast's public offer Sunday. People familiar with the negotiations say Mr. Armstrong wanted to be chief executive of the combined entity until he turns 65 in three years, though it would be clear that Mr. Roberts would be running the show.
To be sure, Mr. Armstrong indicated that his position in a combined cable operation wouldn't be "an impediment to the deal," said a person familiar with the matter. And the request for the CEO slot is fairly standard in negotiating big mergers and was just one of a number of so-called social issues that had remained unresolved. AT&T, for instance, also wanted the headquarters of the combined company to be in New York, not in Comcast's hometown of Philadelphia.
Thursday, Mr. Armstrong wouldn't say whether the CEO slot was something that was requested. "I'm not going to make public what the discussions were," he said.
He added that he wants a chance to prove that AT&T Broadband can prosper. The cable business has reached its "inflexion point," he said, and is now ready to break out of its earnings slump and produce the kind of returns that investors expect. Mr. Armstrong said he would pit AT&T Broadband's management against anyone else's in the industry. |
