Executives don't really need any more lessons about how to do big deals badly. Sumner Redstone's machinations at Viacom have been a good primer. But a graduate course is the soon-to-be published book about AT&T's disastrous plunge into media.
One eye-popping assertion: In its quest to cure the ills of its core long-distance business by gobbling up cable systems, AT&T pushed itself to the edge of Chapter 11.
Written by Leslie Cauley, the book—scheduled to be published in August by Free Press—is aptly titled End of the Line: The Rise and Fall of AT&T. It chronicles the breakdown of one of the great icons of American business, the once mighty Ma Bell.
There's a great story here, but New York gossip columnists will be paging through Cauley's book for its savage portrayal of Leo Hindery, the ex-cable executive who has since become a prominent player in New York City politics.
Cauley covered telecommunications for more than a decade at The Wall Street Journal and USA Today, where she wrote about AT&T's plunge into the cable-TV business. But she also co-authored The Biggest Deal of All, also from Free Press, with Hindery, then president of onetime cable giant TCI and briefly president of AT&T Broadband after the telephone company bought TCI in 1999.
Hindery is currently—among other things—cutting a high political profile as campaign finance chief for Fernando Ferrer, the leading Democratic candidate challenging New York City Mayor Michael Bloomberg.
Cauley and Hindery developed a close relationship during their book project, giving her access to his insights and many documents from that period. Their collaboration apparently ended very badly, if her harsh description of Hindery is any indication. More on that later.
In an uncorrected proof edition of End of the Line, Cauley concludes that “no single decision felled AT&T.” Instead, it was scores of bad decisions “each linked in a daisy chain of managerial incompetence.” (Now AT&T is in the process of selling to SBC Communications, once its Baby Bell subsidiary.)
Cauley focuses on AT&T's recent years, after Michael Armstrong was brought in to save the long-distance giant from a slow death spiral. MCI, Sprint and dozens of smaller long-distance carriers were pecking away at its core business, which accounted for half its revenues and virtually all its profits.
Armstrong's response was to plunge into cable. He believed AT&T needed to push into local-phone business, and cable was his path into the home. Just like the phone company, cable operators had wires running down every street in America. That copper could be carrying phone and video.
AT&T tried to partner with cable operators, but they smelled the desperation and demanded enormous payments. Instead, Armstrong turned to the largest cable operator—John Malone's TCI—and bought it, paying $48 billion.
That's where panic overtook good sense. One misstep Cauley notes: AT&T agreed to the merger without fully inspecting TCI's systems.
They would have discovered what everyone in the cable industry knew: TCI was in no shape to launch phone services as quickly as AT&T wanted. Dan Somers, then CFO and later CEO of AT&T Broadband, drafted projections without thoroughly checking.
Months after signing the deal, an AT&T executive asked to perform some spot checks, but TCI said that “the time for due diligence was over.”
That was a big problem because the cable-telephone rollout was a corporate imperative and AT&T's stock price hinged on it. But, Cauley says, AT&T executives—particularly Somers—seemed blind to its cable woes.
Former AT&T and Cox Communications executive Curt Hockmeier describes his weekly progress reports to Somers on system upgrades, including all the outages, cut lines and other snags. Somers, Cauley says, would “sit there stone-faced.” Week after week, he offered no criticism, no suggestions or feedback of any kind.
Somers was often badly out-negotiated, so much so that other cable operators privately had a refrain: “Dan's in the room.”
Case in point: In a 2000 meeting, he demanded that Cox and Comcast executives commit to sell AT&T their stakes in a high-speed– Internet partnership, @Home, for $27 a share, already 50% more than @Home's trading price.
Comcast's executive, deal guru Larry Smith, consulted President Brian Roberts, who simply said, “Double it.” Smith protested that AT&T wouldn't pay. Roberts' reply: “Yeah, but don't forget, Dan's in the room.” Somers agreed to $48 per share, or $3 billion. Later, @Home went bankrupt.
But what nearly killed AT&T was the takeover of another cable operator, MediaOne. It was Armstrong who cut that $62 billion deal that stretched the company thin. CFO Chuck Noski and board member John Malone feared a gigantic default. AT&T ultimately avoided that, in part by selling its cable systems to Comcast.
While Somers and Armstrong receive harsh treatment in Cauley's book, they don't get it as badly as her former collaborator, Hindery.
She calls him a “carnival barker,” “a junk-food addict with a waistline to match” and, in a particularly cheap shot, a “Queer Eye for the Straight Guy makeover just screaming to happen.”
Tougher still, she contends that Hindery put too positive a spin on operations and deals. Malone describes him as always “sprinkling a little stardust.”
Hindery and an AT&T spokesman say they have not seen any drafts of the book and won't comment in detail. A Hindery spokesman says, “Over the course of 25 months, Leo made tens of billions of dollars for his shareholders and for all parts of the cable industry, for which he was much recognized by the industry and the national media. Leo is very proud of his accomplishments, which were well-documented in his 2002 book with his co-author Leslie Cauley.”
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