Commentary: At&T Can't Buy Its Way Out Of This Mess

The jig is up for AT&T. When reports surfaced on Aug. 18 that the giant phone carrier might merge with behemoth British Telecommunications, its stock barely budged. Two years ago, speculation over that sort of historic transatlantic tie-up would have sparked a sensation. Now, AT&T Chief Executive C. Michael Armstrong has played the acquisition card one too many times. And no deal in the world may be big enough to pump up his company's foundering shares, at $31 apiece on Aug. 23, down 38% from the beginning of the year.

It took a long time. But after three years, a total of $120 billion in announced deals, and a wireless tracking stock that's been a flop, Wall Street seems to have concluded that Armstrong's effort at financial engineering has been a failure. The strategy has left AT&T heavily in debt, with a conglomerate of several poorly run businesses, almost none of which is living up to either sales or profit expectations. Things have become so bad that meeting its annual interest payments may require the telecommunications giant to cut back on needed investment to struggling units.

Here's how AT&T stumbled: First, it paid far too much for cable operators Tele-Communications Inc. and MediaOne. "The prices were way above historical benchmarks," says analyst Bruce Roberts of Dresdner Kleinwort Benson. Then, the deals failed to boost growth as fast as expected. In response, management imposed fierce cost cuts on its more established units that sell voice and data services to consumers and businesses, further restricting their growth. This year, that forced AT&T to lower its earnings targets twice.

NERVOUS BOARD. Now, even AT&T's notoriously complacent board is finally getting nervous. The company had only $7 billion in debt in 1998--it had one of the strongest balance sheets in Corporate America. Today, debt stands at $57 billion. What's more, AT&T needs to shell out more cash if its new cable units are to compete. It still must upgrade its networks for cable telephone service, high-speed Internet access, and digital TV. That could cost as much as $1.8 billion.

So what does AT&T fall back on for cash and growth? Certainly not long distance. As the giant local phone companies enter the long-distance market, AT&T has been losing customers to rivals Verizon Communications and SBC Communications.

Commentary: AT&T Can't Buy Its Way out of This Mess

Meanwhile, besides hits from competition, there has been some very sloppy execution at AT&T's core voice and data units, which still account for about $45 billion of the company's $62 billion in revenue. Robert Annunziata, the former head of the Business Services unit, and H. Eugene Lockhart, the former head of the Consumer Services unit, both advised Armstrong to hire more salespeople and make other investments. He didn't listen. Instead, both men ended up leaving, along with other highly regarded managers. And now performance is deteriorating. Growth forecasts for Business Services have been lowered twice this year, to 6% from an original goal of 9% to 11%. And the consumer unit declined 7.2% last quarter, while WorldCom's grew 8% and Sprint's grew as much as 5%, according to analyst estimates. Meanwhile, Armstrong counters that the company is hitting its targets for cable telephony and high-speed Internet access.

Ultimately, it's all very much a case of deja vu. Just as in 1996, when Armstrong was first brought in to head up a company that floundered under the reins of CEO Robert Allen, AT&T must find a way to get itself--and particularly its core businesses--growing again. More financial engineering is not the answer.