1998: John Keller, The Wall Street Journal
3/1/1998
ASNE Staff
Award for Deadline News Reporting
Sunday, March 1, 1998
by: ASNE Staff

Section: Deadline News Reporting


John Keller

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AT&T's Walter quits after boardroom rebuff

July 17, 1997

AT&T Corp. President John R. Walter, whose relations with Chairman Robert E. Allen had grown increasingly strained, resigned abruptly after the company's board said it wouldn't name him chief executive as planned by Jan. 1.

The stunning decision by AT&T's board, which hired the former printing-industry executive only last November after a high-profile search, capped an unusually public drama played out in the executive suites of a telecommunications giant struggling with seismic changes. AT&T's board took the extraordinary step of airing its low opinion of Mr. Walter in a conference call with reporters yesterday, during which outside director Walter Elisha declared Mr. Walter lacked "the intellectual leadership" to run AT&T. TD Mr. Walter, 50 years old, was told of the board's decision yesterday morning after an evening of intense talks among outside directors and Chairman Allen. These directors, including Mr. Elisha, will launch yet another search for a successor to the 62-year-old Mr. Allen, an indication that Mr. Allen will have a lesser role in this search than in Mr. Walter's hiring. Mr. Elisha made it clear last night that AT&T is looking for a new CEO.

Mr. Walter's exit seems to leave AT&T adrift at a time when it can least afford to be distracted. The company's core long-distance business continues to erode. AT&T is under intense attack in virtually every one of its markets, including wireless services. And its international strategy is in disarray as competitors such as the team of British Telecommunications PLC and MCI Communications Corp., as well as Sprint Corp. and the Baby Bells lock up key alliances.

AT&T's shares closed yesterday at $36.3125, up $1.3125 in New York Stock Exchange composite trading.

Mr. Walter defended his tenure as president yesterday, in a statement in the very AT&T news release that announced his resignation. "I believe I am perfectly qualified to be CEO of AT&T right now," he stated. "I have worked tirelessly on behalf of the shareholders of AT&T."

Mr. Walter, who declined to comment, will leave the job much richer than he began it. He received a $5 million bonus in October when he left his job as chairman of R.R. Donnelley & Sons to join AT&T. And now he will get $3.8 million in severance, plus $22.8 million to cover what he would have potentially earned at Donnelley had he stayed.

"Mr. Walter's services will be in great demand," said Mr. Walter's attorney Robert Barnett, of the Washington law firm Williams & Connolly. "He is one of the world's experts on information services and communications. John Walter will be just fine."

Now with Mr. Walter gone, scrutiny of Mr. Allen's troubled tenure is certain to intensify. Mr. Elisha acknowledged last night that Mr. Allen has become "a lightning rod" of blame for AT&T's current malaise, but he defended the chairman as "doing a terrific job under very trying circumstances."

Many analysts and AT&T watchers had been skeptical of Mr. Walter's abilities to run AT&T since he had never worked in the telecom industry. "He wasn't even close to the best person that could have been tapped to run this company," said David Beirne, a corporate headhunter who has lured several top AT&T executives to other companies.

However, while some questioned Mr. Walter's capacity to run far-flung AT&T, people close to the company said a bigger reason the telecom novice was dumped might have been Mr. Allen's inability to get along with his No. 2. It is a problem that has plagued AT&T's chairman during his nine years in the top job. Mr. Allen had gradually taken away much of Mr. Walter's responsibilities, including merger talks AT&T had been conducting, while offering only lukewarm public support for his colleague. Mr. Allen wouldn't comment.

People close to AT&T weren't surprised by Mr. Allen's actions. For eight of his years as CEO, he refused to name a president with his board's full compliance. Mr. Walter, brought in under an agreement in which Mr. Allen agreed to retire two years early, is now the second president to quit AT&T in a year. Alex Mandl resigned last summer after Mr. Allen wouldn't designate Mr. Mandl as his heir apparent.

Mr. Walter was tapped in October after a three-month search by AT&T's directors and the recruiting firms Spencer Stuart and Korn Ferry. Among those considered for the job were current Eastman Kodak CEO George Fisher, who turned AT&T down at the time. Mr. Fisher has since been elected to AT&T's board, igniting speculation once again that AT&T will try to offer him the job. Mr. Elisha will only say he admires Mr. Fisher and that he would be an obvious candidate, but he wouldn't say whether AT&T would make him a new offer. Mr. Fisher hasn't commented on such speculation. He has a couple of years left on his contract with Kodak.

Only a few weeks ago, Mr. Allen said he had "full confidence" in Mr. Walter. But AT&T insiders knew differently. "Bob very reluctantly agreed to accelerate his own retirement by two years to get John, but when the day for that to happen got closer he didn't want to give up the reins," said one executive.

The tension at the top of AT&T rose during the recent failed merger talks with Bell giant SBC Communications Inc., when Mr. Walter was cut out of the negotiations by Mr. Allen and AT&T's chief counsel, Vice Chairman John Zeglis. It turned out that it was Mr. Walter who first got the call from SBC Chairman Edward Whitacre to do a deal, angering Mr. Allen. "After that, Bob took the SBC deal over for himself and Zeglis," cutting Mr. Walter out of the loop, said one executive.

And all the time Mr. Allen was critiquing Mr. Walter's performance to Mr. Elisha and other noncompany directors. The increasingly critical reviews came during private sessions between Mr. Allen and the board's outside directors, dating back to mid-April, said Mr. Elisha, who is Chairman of Springs Industries Inc. "Bob talked to us for awhile [at the April meeting] and expressed concerns to us," the director said, but he he wouldn't elaborate on what Mr. Allen told the directors. Later in May at another session, "the caution light was on," Mr. Elisha added.

The AT&T board met in a special executive session late into Tuesday night over the Walter succession issue. The final showdown came yesterday morning in a 90-minute session between Mr. Walter and directors in a small conference room in AT&T's lower Manhattan headquarters where he outlined what he felt were his accomplishments at AT&T. The directors left the room and caucused among themselves. Mr. Elisha later met with Mr. Walter again and told him of the board's decision to refrain from naming him CEO in January. Mr. Walter decided at that point to leave, and later working out a suitable news release with the company.

"John was very able" as an executive, Mr. Elisha said yesterday. But he noted the CEO's job at AT&T requires more than just good management acumen. As Mark Twain used to say, Mr. Elisha recalled, the "difference between president and vice president is like the difference between lightning and a lightning bug."

But it remains to be seen whether the telecom experts who remain at AT&T will be able to dust the company off from the latest brouhaha. AT&T said the company's counsel, Mr. Zeglis, now would assume all of Mr. Walter's responsibilities for operations, while AT&T moved Mr. Zeglis's responsibilities for legal, human resources and public relations under Mr. Allen's direct control.

Mr. Allen's closest confidant, Mr. Zeglis was recently elevated to vice chairman, undercutting Mr. Walter's position significantly. Mr. Zeglis gets high marks for his intelligence, particularly in navigating the current regulatory issues surrounding the competitive telecom market, but his new assignment is bound to cause controversy, since he has never run a business.

Mr. Elisha defended the choice of Mr. Zeglis as operating chief, calling him a "very able, knowledgeable and insightful executive. . . . who's also a lawyer." But he would only endorse him as one of a "final 10" list of executives that might be qualified to someday run AT&T. AT&T will look inside and externally for its next CEO, a search that might necessitate Mr. Allen having to stay on longer than expected, he said.

Mr. Walter had grown popular with the troops and senior managers at AT&T, some of whom called analysts incessantly in recent weeks to see if speculation was true that the new president might soon quit. "There are going to be a lot of executives looking to jump ship after this," said one executive recruiter last night. "People here loved John and hated Allen."

The two executives made for an extremely odd couple. The laconic Mr. Allen rarely meets informally with his top executives and is slow to give praise. Executives close to AT&T said that in the past year he has grown increasingly remote after having endured several years of blistering news coverage over his multibillion-dollar failures in the computer business and other investment misfires.

Mr. Walter, on the other hand, "is a born salesman," noted one AT&T executive. "He's energetic, he has charisma; he takes charge."

Mr. Walter adopted an aggressive tone at AT&T almost from the moment he arrived, telling The Wall Street Journal in a front-page story that he hadn't taken the job at AT&T "to be No. 2."

In only a few months, he took command of AT&T's disparate operations, ordering a wide-scale cost review; survived a showdown with the company's hard-charging former consumer-services president, Joseph Nacchio, who resigned; promoted several senior executives to command AT&T's core businesses; and traveled extensively to meet with corporate customers and AT&T employees.

Those workers must be thinking "what now," said Brian Adamik, a senior analyst at Boston research firm Yankee Group and a former AT&T executive. "Nothing amazes me about AT&T anymore," he added. "The company appears to be out of control with a lot of senior defections, a very publicly failed merger attempt with a Bell and its core long-distance business continues to erode."

A committee of independent directors of AT&T will conduct the new CEO search. The group includes Mr. Elisha; Kenneth Derr, chairman and CEO of Chevron Corp.; Donald McHenry, president of IRC Group; Ralph Larsen, chairman and CEO of Johnson & Johnson; and Thomas Wyman, senior adviser of SBC Warburg Inc.


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AT&T's Walter failed to court the one man who counted: Allen

The Two Never Grew Close, And CEO Began Airing His Concerns to Board - A New, Tougher Job Search

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."


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Down to the wire: AT&T's board faces many twists and turns in search for new CEO

If Directors Pick an Outsider The Company May Lose Its Popular Mr. Inside - Hughes Chief in One Scenario

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."


Article list

Outside in: How AT&T directors decided it was time for change at the top

Hughes's Armstrong Is CEO And Zeglis Is President; Allen Is Very Lame Duck - Losing the Faith of a Friend

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.


Article list

AT&T pins its hopes on Michael Armstrong

October 21, 1997

NEW YORK - C. Michael Armstrong, who helped build IBM's overseas business before transforming Hughes Electronics Corp., stepped up to the biggest challenge of his career yesterday: restoring fading AT&T Corp. to its former glory.

AT&T's board, as expected, tapped the Hughes chief executive to be its new chairman and chief executive officer, succeeding Robert E. Allen, who will step down in 11 days. TD An outgoing, high-powered sales executive who spent 31 years at International Business Machines Corp. before going to Hughes in 1992, Mr. Armstrong must improve AT&T's competitiveness, overhaul its culture, and push the company to new heights in the tumultuous trillion-dollar telecommunications world. If he fails, AT&T could fall far behind slicker, well-financed rivals.

AT&T packaged the announcement of its new CEO with the disclosure that it plans to sell its once-stellar Universal Card credit-card business and a customer-service unit. AT&T also posted third-quarter earnings that fell 15% from a year ago but managed to beat analysts' expectations.

Mr. Armstrong, 59 years old, will have to share power with a strong No. 2 who was his chief rival for the top job: Vice Chairman John D. Zeglis, an AT&T veteran. Mr. Zeglis was named president yesterday, but the company held open the post of chief operating officer. And while some people close to the situation said Mr. Zeglis had been tacitly assured he would succeed Mr. Armstrong, the new AT&T chief made it clear he isn't a mere caretaker in the top job and that no promises were made.

"There's been no discussion at all on that," Mr. Armstrong said in an interview following a packed news conference held to announce his appointment. "I don't think the board brought me in to govern-the board brought me in to lead." Mr. Zeglis praised his new boss as "the best operator in the world."

AT&T's brass took pains yesterday to present Mr. Armstrong's selection as a smooth transition of power, creating "the new team to lead AT&T into the next millennium." There were smiles all around, and flashbulbs popped furiously as Mr. Armstrong was introduced. But the tension in the hastily arranged New York news conference was extreme.

The new CEO grinned broadly, in stark counterpoint to the somber Mr. Allen, 62, who is leaving AT&T after 40 years, the past nine of them as CEO. The boyish-looking Mr. Zeglis, 50, sat to Mr. Armstrong's left, arms crossed, with a tense smile.

Investors, apparently endorsing the Armstrong-Zeglis team, drove up AT&T's stock price 5.1% in heavy trading. AT&T closed at $47.50 a share, up $2.3125, in composite trading on the New York Stock Exchange. "This is a great decision for the company," said Craig O. McCaw, who is said to be AT&T's largest individual shareholder with more than $1 billion in AT&T stock. "Mike Armstrong is an outstanding leader who understands technology, and John Zeglis knows the company and its challenges intimately."

Mr. Allen had passed on the chance to hire Mr. Armstrong as his successor a year ago, instead picking John R. Walter, who served eight months and left abruptly in July. This time around, Mr. Allen again opposed hiring Mr. Armstrong, instead endorsing his lieutenant, Mr. Zeglis. Yesterday, Mr. Allen, making possibly his last public appearance as AT&T's chairman, put all that aside.

"Some will ask, 'Haven't we seen this movie before? Why didn't we do this a year ago,' " Mr. Allen said at the news conference. "That was then, this is now." He told the crowd he supports the naming of Mr. Armstrong without "a shadow of doubt in my mind." The departing AT&T chairman will become chairman of the board's executive committee, in a largely titular role he will hold until February 1998, when he retires. Staying on the board beyond that, Mr. Allen said, would have been "potentially inhibiting to the new CEO."

Mr. Armstrong, spreading around some of the praise, also told reporters it was his idea to have Mr. Zeglis named president. "It was on Mike's recommendation that the board elected John Zeglis president," seconded AT&T board member Walter Elisha, who was chairman of the search committee.

At AT&T, Mr. Armstrong will need to attack strategic problems from Nov. 1, when he starts his job. As AT&T in the past year tried to articulate a strategy and find a new leader, its rivals moved quickly to form massive business combinations that aim to attack AT&T on four fronts: longdistance, local and wireless phone services, and the Internet.

AT&T is a distant third in Internet access after America Online Inc. and Microsoft Corp. And the five big Bell companies are girding to challenge AT&T in the residential long-distance market, AT&T's core business. Mr. Armstrong acknowledged the challenges but said it is too early to talk in specifics. "I haven't even walked in the door," he said.

Chances are the Harley-riding Mr. Armstrong has already sized up AT&T's situation and its senior managers. He entered Hughes as CEO right out of IBM, after learning that he wouldn't rise to CEO of Big Blue. Before taking command of the General Motors Corp. unit, he did a detailed analysis of his senior team. In short order, he fired managers who didn't make their numbers, gave Hughes a strong marketing plan for selling TV services to consumers, and laid plans to sell Hughes's giant defense business to Raytheon Corp.

Separately, AT&T's third-quarter net income dropped 15% to $1.22 billion, or 75 cents a share, from $1.43 billion, or 89 cents a share, a year earlier. Net income included a four-cent gain from the sale of the company's submarine-systems business. Revenue increased 1.1% to $13.38 billion from $13.23 billion.

Chief Financial Officer Dan Somers noted that net income from continuing operations of 71 cents a share actually beat analysts' consensus estimates of 65 to 66 cents because of slightly less spending than expected and other cost controls. He said he expects the same performance in the fourth quarter of 71 cents a share.

Long-distance revenue fell less than 1% to $11.7 billion in the quarter. The biggest decline was in the consumer market, where revenue fell 2.4% to $6.08 billion. Business-services revenue gained 1.9% to $5.62 billion. Revenue from wireless services hit $1.1 billion, a 10% increase.

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