<A> (you're welcome) After Warm Welcome, AT&T's Leader Faces Test On Execution
By Shawn Young
NEW YORK (Dow Jones)--So far, Wall Street has been enchanted with AT&T Corp.'s (T) new chairman and chief executive, C. Michael Armstrong, but he'll have to deliver to keep that good will.
At a meeting with Wall Street analysts in New York after the company releases fourth-quarter earnings Monday, Armstrong is expected to lay out his plan to revitalize the weakened giant.
The scenario is likely to include cutting about 15% of AT&T's staff along with restructuring. Armstrong is also expected to shed light on future earnings and outline strategies for competing in new markets like local phone service and Internet, analysts said.
As competitors like MCI Communications Corp. (MCIC) and WorldCom Inc. (WCOM) join forces to offer an array of local, long-distance and Internet services, the Baby Bells are preparing an assault on AT&T's core long-distance business.
Fighting on all those fronts while reducing staff and keeping investor confidence with steady earnings gains will be a daunting task, said Anna-Maria Kovacs, an analyst at Janney Montgomery Scott Inc.
"I'm not sure anyone short of God could do it," she said.
"AT&T is going to see a huge amount of pressure in its core business," Kovacs said, "and the pressure is going to be enormous to make quarter-after-quarter earnings."
Armstrong has no shortage of ideas on how to meet these challenges, she said, the trick will be to execute.
"AT&T has always been a company that's long on promise and short on execution," said Lehman Brothers Inc. analyst Blake Bath. "But now they've got a CEO who is really focused on execution."
Armstrong came to AT&T in November, when former Chairman and Chief Executive Robert E. Allen retired under pressure. Since Armstrong's arrival from Hughes Electronics, a unit of General Motors Inc. (GM), AT&T's much-maligned stock has been resurgent and analysts have been hopeful that Armstrong will reverse the New York company's prolonged slump.
Now it's time for him to be specific about how he will do that, analysts said.
"He understands the importance of this meeting and he won't disappoint," said Frank Governali, an analyst at Credit Suisse First Boston Inc., which advised AT&T on its planned acquisition of Teleport Communications Group Inc. (TCGI).
Governali said he expects the half-day session to yield "an elucidation of all the tidbits" Armstrong has revealed about his intentions.
An attack on AT&T's bloated costs is a top priority, Armstrong said as soon as he was selected.
He has led analysts to expect cuts of $3 billion to $5 billion over the next few years. A cut of $3 billion could add $1.00 a share or more to earnings, analysts said.
Armstrong also has tied managers' bonuses more tightly to performance and jump-started the company's entry into the local phone business with a plan to buy Teleport Communications Group for $11.3 billion.
The Wall Street analysts who will be sizing up Armstrong's plan en masse Monday said they expect loads of specifics on costs and earnings, including details on how savings from the Teleport merger will justify the deal's high price.
What would make people nervous is any hesitancy about cost-cutting or earnings and any sign of passivity, said Governali of Credit Suisse First Boston.
Other analysts said they would be alarmed by any heavily dilutive spending or by failure to address gaping weaknesses in Internet, local and international strategies.
AT&T has sat on the sidelines in those key areas for too long, analysts agree, and it can't afford any more lost time.
In Internet, "they're not really the player they should be,"Governali said.
While the Teleport acquisition will help catapult AT&T into the business part of the local market, AT&T still doesn't have a workable plan for offering local service to its millions of residential customers.
Meanwhile, revenue in AT&T's consumer long-distance division remains feeble.
Rumors have abounded recently that both Gail McGovern, head of the consumer business, and Jeffrey Weitzen, head of the business division, were planning on leaving.
Gateway 2000 Inc. (GTW) said late Thursday that Weitzen will be joining the company as president and chief operating officer.
On the international front, Armstrong has reportedly indicated that he is dissatisfied with the company's approach to international partnerships, which has been criticized as distant and piecemeal at a time when AT&T's main competitors are involved in tight, high-profile alliances.
Most analysts said they aren't expecting specific announcements about additional partnerships or acquisitions, although they expect AT&T, which is nearly debt-free, to do more shopping.
"Clearly acquisitions are going to be a big part of their strategy," said Bath of Lehman Brothers.
Although AT&T's stock has shot up in recent months, it is hardly ahead of itself, bullish analysts said.
"There's a lot of feeling that the stock has done really well and nothing much has happened," said Comfort of Morgan Stanley, but she said it still has catching up to do after its long stint in the doldrums, and Armstrong is making positive changes.
The company has much to gain simply by cost-cutting, Bath said.
"That can buy them a little wiggle room for the next year or two, but they must ultimately grow revenue," he said, which is why expansion into new markets is critical.
Most investors realize that transforming a company the size of AT&T can't be done overnight, Governali said.
He credited Armstrong with moving quickly to get the company focused and motivated and said Armstrong's honeymoon could last longer than many observers expect.
The new leader may get the benefit of the doubt for as long as a year, Governali said. |
