|BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE|
|NEWS: ANALYSIS & COMMENTARY
The Man Behind AT&T's Coup
Cable pioneer Amos Hostetter gets back in the game
Amos B. Hostetter Jr. has enjoyed an idyllic early retirement. Since exiting the cable world abruptly two years ago, the 62-year-old billionaire stockholder in MediaOne Group has been a devoted family man, spending time with his three young children. He has also taken a strong interest in public service, chairing the board of trustees at his alma mater, Amherst College, and setting up a family foundation with his wife, Barbara.
But as Comcast Corp. (CMCSA) found out, the notion that the low-profile Bostonian would fade into silk-lined obscurity was dead wrong. After balking at the terms Comcast offered for his 9.5% MediaOne stake, Hostetter resurfaced as a driving force behind AT&T's surprise $58 billion counterbid for MediaOne (UMG). Despite the threat of a higher Comcast bid supported by everyone from Microsoft (MSFT) to MCI WorldCom (MCIW), on May 4, AT&T (T) emerged the victor. Comcast backed off in favor of swapping some cable systems with the telephone giant and taking a $1.5 billion breakup fee.
''GRACE.'' Now, Hostetter aims to be a key player behind AT&T's plan to morph into a communications juggernaut offering all kinds of broadband services to consumers. He will join its board and become nonexecutive chairman of the unit that would house the country's largest cable operator as well as residential-phone and Internet-access services. ''The Amos Hostetter piece is important to AT&T managing this broadband property,'' says C. Michael Armstrong, AT&T's chairman and CEO. ''How often do you get to [add] staff before you buy?''
Armstrong is being a bit cute: Far from a staffer, Hostetter intends to play an advisory role to Leo J. Hindery, the powerful former Tele-Communications Inc. president who now heads AT&T's Broadband and Internet Services unit. And he will sit on the board alongside fellow cable pioneer John C. Malone, AT&T's biggest single shareholder since its deal to buy TCI closed last month. While Armstrong had plenty of firepower before, he may need all the help Hostetter can muster to roll out his unproven strategy of selling local phone service over cable.
Little known outside the cable industry, Hostetter is revered within it as a patrician figure who was one of the earliest proponents of using cable lines to deliver much more than video signals. ''Amos always walked with a great deal of grace through this industry,'' says Hindery. ''He is Mr. Cable.'' Hostetter's cable roots date back to 1963, when he and H. Irving Grousbeck, a fellow Amherst and Harvard B-school grad, each invested $2,000 in a business they called Continental Cablevision Inc. The pair scoured the nation for towns to wire, starting modestly with Tiffin and Fostoria, Ohio. By 1980, Grousbeck had opted for a career in academia, but Hostetter was making an impression on the industry. ''He was dapper, debonair, a Harvard MBA when most of the cable operators we knew to that point wore white socks and came from technical backgrounds,'' recalls Falcon Cable TV Inc. Chairman Marc B. Nathanson, who entered the business in 1969. ''We all looked up to him, wanted to emulate him.''
Continental became one of the first big operators to follow a strategy of building regional ''clusters'' over which cable systems could be upgraded cost-effectively. Hostetter was also an early believer in using fiber optics to transmit data and access the Net. Continental launched one of the first cable-modem Web-access services--at a daunting $125 a month--in Cambridge, Mass., in 1994.
But upgrading cable is expensive, and Hostetter had avoided taking Continental public. Anticipating the convergence of telephone and video services, in 1996, Hostetter opted to sell Continental to Baby Bell U S West Inc. (USW) for $11.8 billion. Hostetter took his share in stock, and he and his top executives agreed to continue running the show from wharfside offices in Boston that Hostetter had pridefully filled with antiques.
Before long, though, Hostetter clashed with his new telco bosses. A year after the sale, Continental was renamed MediaOne, and Charles M. Lillis, now chairman and CEO, informed Hostetter that headquarters was being moved to Denver. Hostetter angrily resigned, as did most of his top executives. Hostetter signed a standstill agreement with MediaOne that continues to bar him from speaking to the press, but his grudge against Lillis is no secret. Lillis declined to comment. Says fellow cable pioneer Glenn R. Jones, who recently sold his Jones Intercable Inc. to Comcast: ''Amos is a proud guy, and he has a long memory.''
Even with his standstill agreement, after U S West reversed course and spun off MediaOne to its shareholders last year, many observers believed it was only a matter of time before Hostetter returned. Today, the company he founded owns the No. 3 cable operator, serving 5 million subscribers, as well as a slew of overseas and wireless properties, 25% of the Time Warner Inc. (TWX) unit that houses much of its cable and studio assets, and roughly 34% of high-speed Net-access service Road Runner.
In the first quarter of 1999, MediaOne reported revenues of $1.8 billion and operating cash flow of $566 million. That's up 12% and 20%, respectively, from the previous year, but Hostetter has been known to rail about MediaOne's industry-lagging profit margins and high overhead.
On the one hand, he should have been elated to learn of the deal with Comcast, where CEO Brian L. Roberts is considered a top operator. But he was rankled that MediaOne shareholders would be exchanging their voting stock for nonvoting Comcast shares and that the Roberts family would control over 80% of the combined companies' votes while owning only 1% of its stock. ''The concern,'' says one person close to AT&T's bid, ''is whether the blood runs thin three generations from now.''
Almost immediately, Hostetter received a call from Hindery asking if he wanted to join an AT&T bid. Hostetter then sent a letter to MediaOne's board demanding that it release him from his standstill. MediaOne agreed. Then Steven Rattner, the Lazard Freres & Co. banker who was working for Comcast, approached Hostetter about brokering a deal that would satisfy him. Hostetter insisted on voting stock for all MediaOne shareholders, which another Comcast banker says was ''completely unacceptable.'' Notes Merrill Lynch & Co. media analyst Jessica Reif Cohen: ''Had they given up some voting control to Amos Hostetter, this probably wouldn't have happened.''
Roberts isn't so sure. ''That's highly speculative,'' he says. ''In the end, he got a substantially higher price, and I think that is what ultimately motivated Amos.'' Indeed, Roberts says Hostetter even helped Hindery negotiate the Comcast-AT&T truce.
Now, Hostetter will no doubt turn his attention to assisting in the gargantuan task of rolling out phone service over AT&T's vast expanse of cable wires. There is one thing his new partners atop AT&T can be sure of: If Hostetter doesn't like the way it's going, they will hear from him.
By Richard Siklos in New York and Ronald Grover in Los Angeles, with Amy Barrett in Philadelphia
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BACK TO TOP
AT&T: What Victory Means|
TABLE: The AT&T Deal for MediaOne
PHOTO: C. Michael Armstrong
The Man Behind AT&T's Coup
TABLE: The Hostetter Saga
``AOL Has to Do Something Quickly''
TABLE: How AOL Plans to Fight Back
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