Waltz of the Cannibals

How to demolish the telecom industry, in six easy steps.


They laid Ma Bell to rest in Denver last month, on the last day of the second quarter of the fiscal year. She was a sick old gal, but nobody could agree on the cause of death. Rot and parasites had been eating away at her for years, and she'd endured several amputations, bouts of dementia and fits of hubris -- not to mention some peculiar doctoring by high-priced specialists.

Mourners gathered at the Colorado Convention Center to pay their respects. They called it the 120th annual shareholders' meeting of AT&T, but it was really an embalming, presided over by men clad in black suits and undertaker pallors. Security was tight and the program highly scripted, with scarcely a nod to the long and illustrious history of the American Telephone and Telegraph Company. The corporate greeters didn't even recognize one elderly gentleman waiting patiently for admission, who was asked if he was somebody's guest.

Taking stock: Shareholder activist Gerald Armstrong 
sees telecom arrogance rising with executive pay.
Larry Winter
Taking stock: Shareholder activist Gerald Armstrong sees telecom arrogance rising with executive pay.

The man -- Robert K. Timothy, president of Mountain Bell from 1970 until 1982 -- seemed puzzled. "No, I'm a shareholder," he said.

Standing under the company's Death Star logo -- the wavy-lined sphere that replaced the famous Bell symbol in 1984, when AT&T was forced to relinquish control of Mountain Bell and 21 other local phone companies -- the morticians prepped the corpse with astonishing speed. It took titans like J.P. Morgan decades to make AT&T the biggest corporation on the planet. It took current CEO David Dorman ninety minutes to hustle through the formalities of obtaining shareholder approval of the company's acquisition by SBC Communications, one of the "Baby Bells" created by the 1984 divestiture. Subject to regulatory approval, SBC will soon devour the battered husk of its parent for a mere $16 billion, logo and all.

"Clearly, our company has endured a range of significant challenges in recent years," Dorman told the shareholders, racing through a PowerPoint pitch that teetered between prim understatement and brawny hyperbole. The challenges, he explained, stemmed from the "telecom nuclear winter" that has gripped the industry in recent years, triggered by over-investment, shifting regulations, fraud and scandal. The freaky economic climate vaporized half a million jobs and $2 trillion in market value, chalked up $165 billion in defaulted debt, bankrupted several heavy players and pummeled the survivors.

But, hey, the good news is that since 2002, AT&T has boosted dividends, cut its debt by 60 percent and trimmed operating costs by a third, largely by spinning off ungainly pieces of itself. Slimming down made the company prime merger bait for on-again, off-again suitor SBC, even if the dowry was a bit on the chintzy side. AT&T's stable of high-end business customers and global phone and Internet networks, joined with SBC's extensive local, broadband and wireless services, will produce a company with $70 billion in 2004 combined revenues and the potential for some hot and heavy synergies.

When it was their turn to comment, several shareholders let Dorman know they were unmoved by his brisk depiction of dazzling synergies and enhanced value. Although they support the merger as the best path out of a bad jam, union representatives took turns at the microphone blasting current management over pension cutbacks, downsizing and bloated executive-compensation packages. Dorman stood stone-faced through most of the two-minute harangues, declining to respond.

The CEO's uncanny imitation of a wax dummy prompted Gerald Armstrong to hop to the microphone more often than usual. At one point Armstrong, a Denver shareholder activist who's been interrogating bank and utility executives at annual meetings for decades, tried to extract a response from Dorman to the remarks of the previous speaker, Laura Unger, president of Communications Workers of America Local 1150, who'd urged shareholders to oppose the re-election of the current board of directors.

"I have no response," Dorman said.

"I feel shortchanged, frankly," Armstrong replied. "You know, Denver is more familiar with AT&T than you imagine. This great board of directors sent us someone named Joe Nacchio, and they forgot to put a 'hazardous materials' label on him."

The crowd roared. Dorman managed a tight grimace. "I certainly have no comment on that," he said.

Armstrong's jab provided the only moment of levity in a grim affair, but it was no idle quip. The spirit of Joe Nacchio -- the much-reviled former AT&T exec who oversaw Qwest's acquisition of US West, one of the seven Baby Bells formed out of the 1984 crackup -- hung over the convention center like a shroud.

Ousted as Qwest's chief executive in 2002, these days Nacchio is battling SEC charges that he made more than $200 million through a fraudulent scheme to inflate the company's stock. His successors are toiling under a mountain of debt and hungrily seeking merger partners. Spurned by MCI recently in favor of a lower bid from Verizon, Qwest is now the weak sister among the four surviving regional telecom giants -- and, like AT&T, possibly a ripe target for bargain-basement acquisition itself.

Although the local Bell companies and the mother ship parted ways a generation ago, the self-devouring world of the telecom business has made them cozier bedfellows than ever, their miseries closely linked. Two companies, SBC and Verizon, now control the largest wireless services in the country as well as two-thirds of the local phone service, prompting Qwest chief executive Richard Notebaert to warn of an impending "duopoly" in the business. Strategic blunders, technological upheaval, regulatory confusion and economic reversals have made a shambles of the industry -- particularly in places like Denver, once a proud hub of cable and communications empires. But perhaps the greatest devastation has been wreaked by the towering greed and arrogance of top shamans, who've provided a primer in how to ignore the lessons of the past and submarine your own stock.

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