Why At&T Made An Outside Call

Bob Allen names a successor--who has no experience in telecom

The day AT&T announced it had found its new president, John R. Walter gave a very public demonstration of his neophyte status in the telecommunications industry. When the former chairman of R.R. Donnelley & Sons Co. was asked on Oct. 23, at his first AT&T news conference, which long-distance company he uses at home in Chicago, there was an embarrassing pause. "I don't know," Walter admitted. "But I get a lot of bills from AT&T."

Conclusion: This is a guy with a lot of boning up to do before he takes over as CEO of AT&T, as he is expected to do in 1998. The 49-year-old Walter has spent the past 27 years--his entire career--at Donnelley, the world's largest commercial printing company. There, the closest he came to the hugely complex telecom industry was publishing phone directories. The Street's immediate reaction to his appointment was shock at his lack of telecom experience. AT&T's stock dropped by 1 7/8, to 37, the day the news broke. "I don't know why [Walter] fits" at AT&T, says E. Wayne Nordberg, an equity partner at Lord, Abbett & Co., who sold out his position in Donnelley earlier this year but still holds AT&T shares.

But Walter is proven in one way that counts: He knows what it's like to work in an industry going through wrenching technological and competitive challenges. Just as the old copper wires that have carried phone calls for the past 100 years are rapidly being superseded by fiber optics, wireless transmission, and cable-TV lines, so ink-on-paper printing is giving way to software, electronic publishing, and the Internet. And that's why AT&T Chairman Robert E. Allen says Walter was the only serious candidate for the job vacated by Alex J. Mandl in August despite his lack of, as Allen puts it, "marquee value." Instead, Walter was chosen, Allen says, for his proven ability to "transform a large, old-line company challenged by new technologies and changing markets."

NO "MUSCLE PLAYER." There are outsiders who agree Walter may be just what AT&T needs. "They didn't need a big industrial muscle player or a telephone executive," says James F. Moore, chairman of management consultants GeoPartners Research Inc. and a close AT&T adviser. "They needed to bring someone in from the outside who doesn't know that things can't be done."

Certainly, AT&T is at a critical juncture. It is fighting intense new competition in its core long-distance business just as it is putting strategies in place to deal with newly deregulated telecom markets. And the strain is showing. On Oct. 17, AT&T reported that its third-quarter earnings from continuing operations fell 11%, to $1.4 billion, on revenue that increased 2%, to $13.2 billion. It also has lagged rivals significantly in long-distance traffic growth for the past six months. Many investors and employees wonder if the company has lost its direction. "They certainly can't keep doing things the way they've been doing them anymore," says Jeffrey A. Kagan, president of consultants Kagan Telecom Associates. "They need a charismatic leader who can rally the troops."

Is Walter the right choice? He is known as an intense, self-confident quick-change artist. "John is smart, he's youthful, and has a lot of energy," says Arthur L. Kelly, managing partner of investment firm KEL Enterprises Ltd., who sits on the Deere & Co. board with Walter. "I wouldn't minimize the challenge, but if anyone can do it, he can." During his nine years at Donnelley's helm, Walter busted up the 132-year-old printer's bureaucratic manufacturing culture and pushed it into the digital era. In the past five years he has created an entirely new top management team and, says one former Donnelley executive, instilled the notion that "there is no more social contract. A job-for-life no longer exists."

TECH WARRIOR. Most significantly for AT&T, Walter has aggressively gone after a high-tech future for Donnelley. He developed a two-pronged strategy: Take advantage of high tech and electronic-publishing tools while bolstering the company's still-lucrative traditional printing business in developing countries. He has spent some $2.1 billion on acquisitions and capital spending during the past five years to reposition the company. Last year he engineered Donnelley's boldest diversification move, buying Corporate Software Inc., since renamed Stream International Inc., a $1.8 billion producer and distributor of software.

But, like Allen's many efforts to buy AT&T's way into new businesses, Walter's moves have yet to pay off. The transition to Internet and CD-ROM software delivery is moving faster than the company had envisioned. As a result, Stream's diskette-copying business fell way off this year, reporting a nine-month operating loss of $19 million. The company also took a $560 million writeoff for the period, partly associated with Stream. Also like AT&T, Donnelley's stock has been hammered, falling some 24% from its January high, to close at 30 1/2 on Oct 23. Dean Witter Reynolds Inc. predicts earnings this year will fall 26%, to $222 million--the same level as when Walter took the top job.

Despite such setbacks, Walter has the full support of AT&T's board. SBC Warburg senior adviser Thomas Wyman, who heads the AT&T board's compensation committee, says each of the directors met with Walter individually and voted unanimously for his appointment. In fact, say AT&T insiders, the only other executive seriously considered was Eastman Kodak Co. Chairman George M.C. Fisher, who wasn't interested. Walter was first approached in early September, says Allen, and although he expressed deep reservations about the job initially, "I could sense the momentum over a period of time in his interest." One thing that might have clinched the deal: Allen announced he will share CEO duties with Walter as of Jan. 1, 1998, and that Walter will take over as CEO and chairman that May, as Allen retires two years ahead of schedule.

For Walter, the job is an opportunity to remake AT&T. "This is a chance to transform the company, accelerate that transformation, and move decisions down to a point in organization where people have accountability," Walter says.

He has already faced down one tough challenge--playing golf with Allen, an avid linksman. Allen's handicap is 9, Walter's 14, and the current AT&T chairman beat him easily. Allen's advantage isn't likely to narrow. With the job Walter has ahead of him, there won't be much time for golf.

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