Time May Be On John Walter's Side

Despite rumors, AT&T's president still holds a strong hand

Where is AT&T President John R. Walter? As rumors fly that he will be forced out if merger talks between AT&T and SBC Communications Inc. lead to a deal, the heir apparent to Chairman and Chief Executive Robert E. Allen is nowhere near his office in the Basking Ridge, N.J., headquarters. On the evening of May 29th, he and his wife, Carol, boarded a flight to Europe for a scheduled 10-day vacation.

And why not? AT&T is abuzz with chatter that a deal would leave SBC's forceful chairman, Edward E. Whitacre Jr., in the top job at the merged company--and Walter in limbo. But Las Vegas bookmakers and antitrust lawyers aren't giving the proposed merger great odds for survival. If the $50 billion-plus merger advances, the conventional wisdom goes, it will run into tough opposition from government regulators.

"NO BEARING." Walter, however, may not have to count on trustbusters to save his shot at succeeding Robert Allen as chairman and CEO of AT&T. Under the terms of Walter's contract with AT&T, BUSINESS WEEK has learned, the highly ambitious executive is guaranteed the CEO's job by January and the chairmanship by the next annual meeting, in May, 1998, when Allen, now 62, says he will retire. Since industry analysts figure government scrutiny of the merger should take at least a year--Nynex Corp. and Bell Atlantic Corp., which announced in April 1996, are still waiting--Walter should be well-ensconced in the corner office by the time a merger is completed. "If the board is committed to honoring John's current contract, then all this other stuff has no bearing whatsoever," says a Walter ally. "If the deal goes forward, it will be John striking the terms of that agreement, not Bob."

In the case of a merger, Walter--who already got a $5 million signing bonus to join AT&T, along with a hefty option grant on 312,500 shares--could walk away with a golden parachute of more than $20 million. And given his employment contract, if he decides not to go quietly, those financial incentives may prove just an opening bid for an Ovitz-like goodbye.

Whatever the outcome, some industry executives view the merger talks--initiated by Allen--as a sign that Allen has cooled to the new president. "It looks like the guy's legs have been cut off," says one former AT&T executive, who says he also finds it odd that Walter would be out of the country now. "When your company is in the middle of discussing the biggest merger ever, you don't go on vacation."

In a May 30 memo to employees, obtained by BUSINESS WEEK, Allen called the reports of the merger negotiations and Walter's possibly shaky future "speculative stories," leading to "a good deal of hallway talk, distraction, and diversion from the tasks at hand." But he stopped short of denying that a merger was being contemplated or discounting rumors that Walter may lose his shot at the top job if a deal happens.

Reports of a potential merger were hardly the beginning of Walter's troubles. Insiders say it's obvious that Walter, who before joining AT&T spent his entire career at Chicago-based printer R.R. Donnelley & Sons, had a rough time gaining control of the sprawling phone company from the start. News of Allen's plan to groom the 50-year-old executive as his successor rated a loud Bronx cheer from Wall Street: AT&T stock lost more than $3 billion in value on the day Walter's appointment was announced. Since then, insiders say it has been awkward for Walter to carry out his job as president and chief operating officer with Allen still hovering as CEO--a situation Allen insisted on because of Walter's lack of experience in the telecom business.

Allen, sources say, was clearly perturbed when the would-be successor gave an interview to The Wall Street Journal last December in which Walter boasted that he was essentially running the show, with Allen acting as his adviser. And six weeks ago, in an unpublicized move, strategic planning was shifted from Walter to General Counsel John D. Zeglis, an Allen buddy. An AT&T spokesperson says the shift was made to lighten Walter's load and that there is no friction between Allen and Walter. "In eight short months, [Walter] has already made significant contributions that have improved AT&T's organization and operations," Allen said in a statement to BUSINESS WEEK. "John continues to have my full confidence and support."

STILL THE BOSS. Little more than three months ago, Allen also insisted that he and his hand-picked successor were working closely together--even while reminding a reporter that he was still the boss. "Bob Allen is still the CEO, and what AT&T needs more than anything else is operational leadership," he told BUSINESS WEEK. "John has taken on that task. I don't have any reservations at all about the transfer or the sharing of power." Yet, in the same interview, he referred to Walter as his "probable successor." When he introduced the Donnelley executive back in October, Allen made it clear Walter would take over the CEO's job, period, in January, 1998.

As for the SBC talks, they may have nothing to do with Allen's relations with Walter. "This is hardly a sinister attempt by anyone to diminish John Walter's potential with AT&T," says a friend of Walter's. "It has a lot more to do with Bob and his attempt to salvage a reputation tarnished by NCR." The ailing computer unit was spun off last year, as was the company's equipment-making subsidiary, now known as Lucent Technologies Inc. The move, intended to better focus the company, has not produced results: AT&T continues to lose market share in its core long-distance market, and the stock is now selling at 351/8, well off its 52-week high of 45 1/2 and more than $2 less than what it sold for on Oct. 23, when Walter was named president.

Allen is hoping that a bold deal with a Baby Bell will jump-start a turnaround and help the company in its beleaguered efforts to get into local service. If the talks collapse with SBC, sources say AT&T may restart merger discussions with BellSouth Corp. or GTE Corp. Whatever happens, it's clear that reports of Walter's demise are premature. And judging by his employment contract, he's one tough negotiator, too.

Before it's here, it's on the Bloomberg Terminal.