At&T's Bold Bet

He's no technology whiz. He never attended Harvard B-school. He's not even much of a public speaker. But in his quiet, determined way, AT&T Chairman Robert E. Allen has succeeded where dozens of other CEOs have failed. He has taken one of the world's most entrenched corporate cultures and turned it around, shattering the old icons, cleaning out the deadwood, luring in outsiders, and infusing a sprawling empire with a simple, overarching vision of the future. Most important, he has had the guts to do--and spend--whatever it takes to make that vision a reality. No halfway measures for Bob Allen.

So maybe it shouldn't have come as a surprise when on Aug. 16, he announced that instead of taking a minority stake in McCaw Cellular Communications Inc., as the two companies had agreed in principle last November, American Telephone & Telegraph Co. would take over the No.1 cellular-phone company outright for $12.6 billion in new stock. After all, just two years ago, seeing that AT&T's own computer division was probably never going to end its losses and become competitive, Allen didn't hesitate to mount the biggest takeover in the history of the computer business: the $7.5 billion buyout of NCR Corp.

"ANYTIME, ANYWHERE." With the McCaw merger--which should be completed within a year, barring regulatory snags or successful lobbying against the deal by irate rivals--Allen will have put the pieces in place to realize his vision. It's an idea captured in a simple slogan: "anytime, anywhere" communications. In reality, that means a pervasive, high-tech communications system that will actually track people down and deliver a phone call or a fax, whether they're in the office, on a ski lift, or sitting in an airplane. With AT&T's "intelligent" long-distance network as the backbone, Allen plans an array of communications services that will make it possible to move and use information in new ways. It's a vision that includes voice, electronic mail, and even video, all zapped across AT&T's digital-information superhighway and delivered to conventional phones, computers, TVs, cellular handsets, and, soon, to a new generation of wireless devices.

Allen is betting billions that this will all come to pass. In addition to McCaw and NCR, whose computers will be a key link in the anytime-anywhere scenario, AT&T has acquired or invested in a dozen unproven startups to give it hardware and software for the new era of communications. These range from EO Inc., a maker of a wireless "personal communicator" to 3DO CO., a designer of sophisticated set-top boxes for interactive television (table, page 28).

The financial risk alone is sizable: AT&T is paying $12.6 billion in stock for McCaw and is assuming $4.9 billion in McCaw debt. There's technological risk, too, such as the possibility that a new wireless system called personal communications services (PCS) will emerge as a major rival to cellular. But most of all, Allen's acquisition binge brings major management challenges. While he tries to absorb the McCaw operation, develop the new businesses, and focus the company on a brave new digital future, Allen can't afford to take his eye off the core long-distance business or to let up on his plans for global expansion. "AT&T has bitten off a great deal in the last few years," says Frank Plumley, an analyst with Standard & Poor's Corp., which is reviewing AT&T's debt rating for a possible downgrade after the announcement of the McCaw buyout.

Allen isn't blind to the risks. But he's also painfully aware of how dangerous it would be not to make these bold moves. When he took over in 1988, AT&T was still reeling from the breakup of the Bell System. It had slashed overhead, but its efforts to enter key new businesses such as computers were foundering. AT&T hooked up with such companies as Olivetti and Sun Microsystems Inc. to get into the market, but old-line managers continued to push homegrown technology. Allen put an end to that by buying NCR and having it subsume AT&T's computer division. Throughout the company, Allen has upended traditional thinking by bringing in outsiders to head key operations.

In some ways, Allen has little choice. If he can't stir things up and move AT&T into new, fast-growing markets, he could be stuck presiding over another corporate dinosaur. With annual revenue growth averaging about 5%, the core long-distance business is maturing, and stiff competition from MCI Communications Corp. and Sprint Corp. keeps a lid on profits. Many of AT&T's other businesses, such as making phone equipment, are unreliable profit generators. And, beset by recession in European markets and a computer-industry malaise, NCR hasn't proved as profitable as Allen had hoped.

ON THE SIDELINES. By acquiring McCaw, Allen solves two problems at once. He not only positions AT&T for the future, he immediately makes up for one of the company's biggest blunders of the 1980s--missing out on cellular. AT&T Bell Laboratories invented cellular technology, and AT&T began selling cellular-transmission gear to other network operators years ago. But while McCaw, GTE, the Baby Bells, and others blanketed the nation with cellular transmitters in the 1980s, AT&T, strangely, sat on the sidelines. Why? "There wasn't any really good reason," says Allen. One explanation: After being distracted by its wrenching divestiture, AT&T simply may have misjudged the scale of the opportunity before it.

Now, Allen may be paying a premium to get in late: At an estimated $280 per potential subscriber, the McCaw deal is one of the priciest cellular buyouts ever. Still, there's plenty of opportunity left. If growth in cellular calling continues at double-digit annual rates as expected and new services such as wireless data links take off, AT&T could soon see fatter earnings. So despite the dilution of its stock from the new shares issued to buy McCaw, and the cost of absorbing McCaw's debt, AT&T is predicting growth in earnings-per-share next year, though not at the pre-merger pace.

The better the synergy between the McCaw and AT&T networks, the bigger the potential payoff. That's why AT&T's managers began to feel this spring that a proposed minority investment in McCaw and a marketing alliance didn't go far enough. As they negotiated the joint venture sketched out last November, the AT&T team, led by Executive Vice- President Alex Mandl, began to see problems, especially in divvying up the proceeds from calls traveling over the combined network.

Returning from one grueling negotiating session at McCaw's Kirkland, Wash., headquarters in June, Mandl and his staff began to talk of changing the deal to an outright takeover. They presented the idea to Allen, who gave the go-ahead for them to approach Craig O. McCaw, the company's CEO.

Would McCaw bite? The 43-year-old entrepreneur, starting from his Stanford University dorm room in 1969, had parlayed a tiny, family-owned cable-TV system into the leader of the cellular-phone boom. In the process, he built a $1.7 billion, 4,400-employee empire. McCaw, who with his family controls 8% of the company's stock, was thought to be leery about ceding control to AT&T. But when Mandl broached the idea of a buyout, he "learned that McCaw was thinking the same way," Mandl recalls.

HEAD OVER HEART. Why? By then McCaw saw that it was more important for his company's future to create the combined network with AT&T than for him to retain control. "In his heart, he would wish that it wouldn't be better to merge with AT&T," says McCaw Vice-Chairman Wayne Perry. But the head won out. "We couldn't see getting into a situation where we were constantly worrying about which part of the business belonged to which entity," McCaw says. "The business opportunity is an absolute. If we can't get it right, we will become one of 3,000 failed strategic partnerships. Life is too short."

Even after the parties agreed to the idea, though, the deal was touch-and-go until the last few hours. Over the weekend of Aug. 14-15, McCaw, his three brothers, Mandl, and their advisers camped out at various New York hotels and law offices. Not knowing what would happen, McCaw's public relations people prepared various press releases, including one saying they couldn't reach agreement with AT&T. But over soggy Chinese food and cold pizza, the McCaw brothers finally decided late that Saturday night to sell out.

What they get in return is $2.5 billion in AT&T stock, making them as a group the company's largest private shareholder, with 3% of the total. By combining with AT&T in a "pooling of interests" stock swap, Craig McCaw and family members avoid capital-gains taxes. And AT&T won't have to write off an estimated $12.5 billion in goodwill from the merger. "Looking at it strictly as a financial proposition, it's a terrific deal," says Lehman Brothers Inc. Managing Director Robert Willens, a tax expert.

Craig McCaw also gains a seat on AT&T's board. McCaw will give up his CEO post and management of the cellular unit will be up to McCaw President James Barksdale. But the founder says he'll continue to oversee his company from the AT&T board. He won't be a passive director on other matters, either. "Craig is a fiercely independent thinker," says Marc Porat, president of General Magic Inc., a software maker, part-owned by AT&T, that Craig McCaw advises. "He will add a voice to AT&T's board like they've never heard before." Says McCaw: "We've been invited to cause a little trouble within AT&T. My future becomes related to the success of AT&T and its investments, not the least of which is this entity."

INCHING BACK. The McCaw deal has the potential to create a lot of trouble beyond AT&T. The specter of a nationwide cellular-phone service marketed under the powerful AT&T logo has competitors nervous. Worse, say the Baby Bell telephone operating companies, by extending its network directly to consumers through cellular phones, what AT&T is really doing is inching back into the local phone business it exited as part of the Bell System breakup. "That's horse manure," says Allen. "This is not a local exchange service. Only an infinitesimal part of the local exchange calling traffic is carried on cellular." Allen insists AT&T has no intention of getting back into the local phone business.

Well, maybe not right away. Today, the price of cellular calling makes it an unattractive alternative to the local phone system. But the arrival of PCS could change all that. The new technology could one day compete with McCaw's cellular system. But McCaw and AT&T are testing it, too. One reason: PCS eventually could be cheap enough to compete with wired phone service into homes and offices.

How real the PCS threat is remains to be seen. Even without PCS, however, the merger of AT&T's wired network and McCaw's wireless system could be a boon to AT&T's bottom line. Today, 99% of all cellular calls go through a local phone system before they reach their destination. Analysts expect AT&T will find ways to link cellular customers directly to its long-distance network, bypassing the local phone system, thus reducing the $14 billion a year it pays to use those lines. In addition, with a combined cellular-long-distance network, AT&T can offer package discounts to big customers. That's a marketing approach the Baby Bells can't match, because they are required to offer all customers a choice of long-distance carriers. At minimum, they complain, AT&T will use its link with McCaw to skim off the most lucrative business customers.

The minute the AT&T-McCaw deal was announced, the local phone companies swung into action, issuing press releases and mobilizing lobbyists. Their target: eliminating the rules that bar them from long-distance service and telephone-equipment manufacturing. "It's a vivid, vivid reminder to our federal government that it's time to get rid of some of these outdated restrictions and put everybody on the same equal footing," says Bell South Corp. CEO John L. Clendenin. Bell Atlantic Corp. says it will try to block the McCaw deal at the Federal Communications Commission and the Justice Dept. But it admits its real aim is to overturn the Baby Bell restrictions.

The AT&T-McCaw link may finally give the Baby Bells the ammunition they need to sway regulators--especially if they agree to give up their near-monopolies in local service. So, Allen seems to be taking a calculated risk: that the revenue to be gained through wireless services and the access charges he might save will far outweigh what AT&T could lose if the Baby Bells are granted the right to enter long-distance.

Allen is making one more bet. He hopes the McCaw deal will boost AT&T's business outside the U.S. The goal is to lift today's nearly 25% of revenues to an eventual 40%. Though McCaw's presence now is largely domestic, that could change sharply under AT&T's wing. "We receive two or three requests a day to do something internationally," says Chairman McCaw. But due to McCaw's U.S. focus and lack of resources, most such offers are turned down, he says. Outside the U.S. the company only operates cellular systems in Mexico and Hong Kong. "Now the opportunity to pick and choose the best of those is certainly more available," McCaw says. "We are a huge step in [AT&T's] being a major service provider in other countries around the world."

Cellular service is particularly popular in less developed countries such as Hungary and China, which can use the technology to establish modern phone service far more rapidly than with wired systems. Ken Zita, a partner at Network Dynamics, a New York-based telecommunications consultant, believes McCaw will serve as AT&T's way to wedge its foot in the door of overseas markets. AT&T can offer McCaw's undisputed expertise as an enticement to allow it to build cellular systems. Later, it could expand in those nations into wired networks and other AT&T offerings, he says. But McCaw also could help AT&T expand in Europe, where regulations and other restrictions bar most of AT&T's wired phone services but don't generally apply to cellular.

Of course, AT&T is hardly the only big player to see the explosive potential in wireless communications. Nearly every local phone company wants a piece of the action, along with other cellular operators such as U.S. Cellular, cable-TV operators such as Tele-Communications and Time Warner, paging concerns such as SkyTel, and dispatch radio systems such as Nextel Communications. An upcoming auction of newly freed-up radio spectrum by the FCC, aimed at PCS systems, will bring even more entrants to the market.

WIRELESS WORLD? AT&T's long-distance rivals are also waking up to wireless. The largest, MCI Communications Corp., has nearly $5 billion in cash burning through its coffers thanks to its recent deal to sell a 20% stake to British Telecommunications PLC. MCI Chairman Bert Roberts Jr. says a wireless system is among the items on his shopping list. Sprint Corp., the No. 3 long-distance company, also gained a wireless presence through its merger last year with Centel and plans to integrate the Centel cellular service with its own wired network, much like AT&T's goal.

But they'll be hard pressed to match the McCaw acquisition--or to catch up with AT&T's aggressive investing under Allen. When General Magic made it known it was looking for partners, AT&T executives "were all over us--AT&T just blew away the competition with their aggressiveness," says Marc Porat of General Magic.

All these deals, including McCaw, are aimed at increasing traffic over AT&T's network. "The way you do that is by inventing new ways of using the network," says Alain Rossmann, CEO of EO, whose personal communicators will mesh nicely with McCaw's system. "AT&T is big--bigger than IBM. But they're incredibly focused."

Bob Allen says this may be his last big move for some time. The McCaw merger has taxed even AT&T's copious coffers. "We'd be straining the balance sheet" to do another major deal, he says. Now, Allen says, his task will be "to make these mergers work and to extend our presence around the globe." It's a tall order. But there's little reason to doubt Allen's determination.

      What AT&T will get from its acquisition of McCaw 
      Cellular Communications
      McCaw has 2.2 million subscribers in 100 cities--about 20% of the U.S. market. 
      AT&T, which has no cellular services, can now sell cellular packages bundled 
      together with its long-distance services. 
      AT&T gets a network that can be used for wireless services and products already 
      in development. These include handheld personal communicators,  video games, 
      and messaging and networking software.
      McCaw's clout will help AT&T compete for cellular licenses in foreign markets, 
      creating major opportunities--mainly in developing countries.
      AT&T's 1992 net income was $3.8 billion, McCaw's operating profit was $285.6 
      million. Combined revenues totaled about $67 billion--making AT&T the largest 
      U.S. technology company.
      The acquisition will raise AT&T's total debt by about 30%, to $21.2 billion, 
      to 60% of the companies' 
      combined capitalization of $35 billion.
      The total will come to 322,300, including McCaw's 4,400 and Lin Broadcasting's 
      1,900. AT&T says no layoffs are planned as a result of the acquisition. 
      AT&T's early diversification strategy didn't pan out very well, producing 
      unsuccessful alliances with Sun Microsystems and Italy's Olivetti. Since then, 
      CEO Robert Allen has engineered a string of investments in computers, software, 
      multimedia, and other key technologies.
      DEC. 1989 Spends $285 million to acquire ISTEL Group, a British high-tech 
      JUNE 1989 Exchanges $135 million and a 20% stake in AT&T Network Systems 
      International for 20% of Italtel, Italian communications equipment maker
      JULY 1989 Gives up on 1983 Olivetti investment, exchanging it for a 17.3% of 
      Olivetti parent Compagnie Industriali Riunite
      DEC. 1990 Buys Western Union's Business Services Group for $180 million. New 
      name: AT&T EasyLink Services 
      JUNE 1991 The Sun Microsystems deal unravels. Sells 19% interest in workstation 
      maker, acquired in 1988
      SEPT. 1991 The big one: NCR joins the AT&T portfolio, for $7.5 billion in stock
      APR. 1988 Allen appointed chairman and CEO after James Olson dies
      JULY 1988 His first deal: A $112 million investment in a joint venture with GTE 
      Corp. to develop digital switching technology 
      MAR. 1989 Buys Paradyne, a data communications equipment company, and Eaton 
      Financial, an equipment financing unit
      APR. 1993 Buys Shaye Communications of England, a manufacturer of the next 
      generation of digital cordless phones, for undisclosed sum
      JUNE 1993 Forms partnership with video game company Sega of America to develop 
      technology enabling video game play over phone lines 
      JULY 1993 More games: Gets a 20% stake in the Sierra Network, an on-line 
      interactive net work since renamed the Imagination Network
      AUG. 1993 Raises its stake in EO to 51% and announces that GO will merge into 
      EO. Also 
      invests in Knowledge Adventure, a multimedia educational software company
      AUG. 16, 1993 Announces plan to buy McCaw Cellular Communications for