Commentary: How the "Turnaround CEO" Failed to Deliver

By Peter Elstrom

It's hard to remember the euphoria that greeted C. Michael Armstrong when he was named chairman and chief executive of AT&T (T ) on Oct. 20, 1997. Back then, the long-distance giant had been floundering for years under his predecessor, Robert E. Allen. With a stellar track record from his days at IBM (IBM ) and Hughes Electronics Corp., Armstrong came in as the superman CEO who could fix the flagship of American telecom. The stock surged as rumors of Armstrong's appointment swirled--and jumped another 5%, to a split-adjusted $25, the day of the announcement. "This is great news," said analyst David Otto of Edward Jones at the time. "We have a turnaround CEO in a turnaround situation."

My, how things have changed for Mike Armstrong. Now, four years later, all the hype and outsized expectations have vanished right along with the stock market frenzy that helped propel those hopes. Armstrong laid out a grand vision to remake AT&T, overhauled his strategy amidst Wall Street complaints, and failed to deliver on both counts. "He may be a business-school case study of a successful CEO whose skills were not transferable," says Robert Frieden, a professor at Pennsylvania State University.

A series of execution problems at AT&T, compounded by the telecom industry meltdown, have left the company down and out. Its stock, which peaked at $49 adjusted for splits and the spin-off of AT&T Wireless back in 1999, had tumbled to $17.27 on July 6. When cable giant Comcast Corp. (CMCSK ) made a $55 billion bid for AT&T's cable operations on Sunday, July 8, investors seemed ready to replace their erstwhile savior. AT&T's stock spiked 20% over the next two days, to $20.64. "Shareholders are angry at AT&T and Armstrong," says Scott C. Cleland, an analyst with the Precursor Group. "They want someone who will create value at the helm, not someone who will destroy value."

That's why Armstrong's days as head of AT&T--or whatever remains of it after the Comcast fight--seem numbered. Most analysts and investors think he will ultimately have to sell the cable unit. If that happens, the remaining telephone operations are likely to be scooped up by the Baby Bells or foreign acquirers. Armstrong had wanted to become the CEO of the cable business, known as AT&T Broadband, when it was spun off next year. Instead, he may have to settle for a short stint as head of AT&T's telecom operations before retirement.

STUBBORN CULTURE. Why couldn't the super-CEO save AT&T from what looks to be an ugly demise? In reality, he may never have had much of a chance. The telephone giant was run as a monopoly for decades and, even after its breakup in 1984, continued to have the management, cost structure, and culture of its past. When the Telecom Act of 1996 laid the groundwork for the Baby Bells to get into long distance, AT&T's core business was doomed. Armstrong grabbed control, slashed costs, and then bet more than $100 billion buying the cable businesses that he could move into local telephone and broadband Net services. But neither he nor AT&T moved fast enough: The long-distance business collapsed before Armstrong developed the local phone and Net initiatives. "I don't think there are five people who could have turned AT&T around," says Ken McGee, an analyst at Gartner Group. "Mike was one of the possibilities, but he failed."

Armstrong made plenty of mistakes along the way. He fumbled the delivery of data services to business customers last year. His in-your-face leadership style alienated some top execs, leading to heavy turnover. And he misjudged how quickly the core telecom business would deteriorate. Last May, he conceded that the company was going to badly miss its financial targets for the year. AT&T's stock plunged 14% in a single day. Armstrong admits that he didn't foresee the troubles, but his rivals didn't, either. "This company missed it, our competitors missed it, the whole industry missed it," he insists.

All those gaffes pale in comparison to what will forever define Armstrong's tenure: his acquisitions of cable players Tele-Communications International Inc. (TCI) and MediaOne Group. His concept of using the cable networks to move AT&T into local telephone and broadband services may have made sense, but Armstrong couldn't execute fast enough to satisfy shareholders. When the long-distance business hit the skids last summer, the new initiatives were suffering technical problems and were too small to make up the difference. "He promised the equivalent of the D day invasion," says Cleland. "He was more vision than execution." By last October, under shareholder pressure, Armstrong said he would break AT&T up into four pieces, opening the door to Comcast.

Armstrong takes strong exception to the argument that he has failed to remake AT&T. For starters, he says, it's way too early to discuss his legacy, since he is still overseeing AT&T telephone and cable business. "Legacy is about what you've done; I'm so consumed with doing," he says. Aside from the cable business, he points out that he has invested tens of billions in AT&T Wireless, international networks, and in local operations for business customers. "This is not the AT&T communications company that we started with," he says. "This is a powerful, state-of-the-art communications company." What's more, he says he won't sell the cable business to any company that will compromise his strategy. He wants to make sure that any acquirer continues to invest in the local telephone and broadband Net services.

But Armstrong may no longer control the unit's destiny. Investors will probably push him to sell to the highest bidder. And Comcast does not seem inclined to invest heavily in the local phone business. That would be a blow for AT&T's onetime savior. He will leave AT&T as something less than the superman in pinstripes that he once was.

Elstrom writes about tech and telecom from New York.

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