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At&T Faces Hard Calls


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AT&T FACES HARD CALLS

Will the board make sure Allen delivers on an ambitious plan?

It took just one day at AT&T for the waters to close over Alex J. Mandl. On Aug. 20, the day after Mandl resigned from the company's No.2 job to head a tiny wireless startup, AT&T Chairman Robert E. Allen resumed business as usual in the monthly session of AT&T's Global Operations Council. The only glitch: an agenda that listed Mandl as president and chief operating officer. "Alex made real contributions while he was here," Allen said during a meeting break. "But the whole team is working as if that never happened. It's almost a rallying point. If anything, we're going to accelerate the pace of our activity."

Keeping chins up and moving on is becoming a familiar routine at AT&T. Under Allen, the company has been coping with problem acquisitions and divestitures and repeated strategic errors, ranging from the disastrous purchase of NCR Corp. in 1991 to the pain of the ongoing "trivestiture" that will split AT&T into three companies by the end of this year.

The strategy now is to exploit AT&T's heft and brand name to provide customized packages of all types of communication services to individuals and businesses. But does AT&T's management have what it takes to stop stubbing its toes and deliver on a complex, ambitious business plan? And will the company's board of directors keep careful enough tabs on its progress?

Mandl's leaving was a loss. And while the board still gives Allen a strong vote of confidence--allowing him, for example, to manage the search for Mandl's replacement--it's unclear how much oversight it is actually exercising. Five of the nine outside directors own less than $100,000 in stock--not much, given their pay of $30,000 a year plus $1,500 per meeting. Such generous compensation relative to directors' stakes can make them overly friendly to management, says Charles M. Elson, a law professor at Florida's Stetson University.

Most board members declined to be interviewed, preferring to let Allen speak for the company. But director Thomas Wyman, a former chairman and CEO of CBS Inc. who is also a member of General Motors Corp.'s activist board, says AT&T's directors are quiet only because they are happy with Allen's performance. "In terms of involvement of directors, AT&T is very much in the top 25% of the class," he says.

STINGING. Wyman and his fellow directors buy the strategy crafted by Allen's team. By providing both business and residential customers with one-stop shopping, AT&T aims to develop lasting relationships and escape price wars for its products.

Executing that plan will be tougher without Mandl, though. Abrasive at times, he brought valuable energy to the executive suite. And his departure stung harder because he is chucking a chance to lead one of the world's biggest telecommunications companies to join one of the smallest. Associated Communications LLC has less than $1,000 in revenues to date. Its main assets are airwave licen-ses. Mandl is its first employee. Yet as chairman and CEO, he will receive a $20 million signing bonus, a $1 million salary, and stock that could become worth hundreds of millions of dollars. That's more than anyone at AT&T stands to make, including Allen, who still stings from criticism that he should not have been awarded a large raise while laying off tens of thousands of employees.

AT&T watchers say that flap has made a quiet manager even quieter. "Allen has become a behind-the-scenes guy, and what we've been looking for is the bull in the china shop," says Berge Ayvazian, executive vice-president of market researcher Yankee Group Inc.

Don't count on AT&T recruiting a bull to replace Mandl, either. The board willing, Allen plans to remain until he reaches 65 in January 2000. That could scare off some top candidates--especially since the board is unlikely to make any new hire the heir apparent unless Allen himself advocates such a commitment, says director Wyman. "We just couldn't know enough to do that responsibly," he says.

MULTITUDE OF SINS. Allen sees AT&T as poised for great things. It is the nation's biggest provider of long-distance and cellular service. It owns a piece of DirecTV, the direct-broadcast-satellite television service. It now offers Internet access. And it aims to become the biggest player in local phone service within 10 years. But AT&T still needs to figure out the best way to package those components for various types of customers. Yankee Group's Ayvazian says that if AT&T provides them with too many options, "what they'll end up with is a Chinese menu."

Booming growth and stable pricing in the long-distance industry have hidden a multitude of sins at AT&T. The Baby Bells aim to break up the cozy oligopoly that gives AT&T, MCI, and Sprint more than 90% of the market. Already, pricing pressures in consumer long distance--a business Mandl ran--have pushed AT&T's stock price back where it was before last September's trivestiture announcement--to around 54.

Allen concedes that the company's prospects may seem cloudy. "We're in this kind of a lull period where our plans are not clear because it's just messy work," he says. The messiness includes hammering out dozens of deals with local phone companies for reselling services. "One of these days, we'll break out," he says. "One has to look at a business like AT&T over a longer period of time than just a year in which the whole industry is in turmoil."

True enough. AT&T sits astride some of the fastest-growing businesses in the world. But the company needs to execute. Allen is giving himself 3 1/2 more years to make it happen. Shareholders, who have seen a $23 billion decline in AT&T's market value this year, may not be that patient.By Peter Coy in New YorkReturn to top


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