'Whitacres way' put AT&T at top of list
He helps turn the Telcom into Forbes' Company of the Year for 2006
By Dennis Kneale, Forbes
On 4,000 sun-baked acres of mesquite, blackbrush and cactus 60 miles
south of San Antonio, Tex., AT&T Chairman Edward E. Whitacre Jr. keeps
a Texas-size ranch house, five man-made ponds stocked with hungry
bass, and a beaten-up bulldozer built in 1955. He pilots the
Caterpillar, ancient, ugly and creaky, to clear acres of thorny
thicket and scrub brush. "It still gets the job done," he says
protectively.
Whitacre takes a similar skinflint's approach as the new AT&T embarks
on a digital video revolution. In an audacious bid for new business
AT&T aims to sell a panoply of video programming to customers of its
phone services. It is building an all-Internet network, encompassing
40,000 miles of newly laid fiber-optic lines on the cheap.
AT&T's U.S. archrival, Verizon, is spending $18 billion in six years
to cover 18 million homes by 2010, digging up trees and tulips to lay
fiber to each and every house. AT&T will expend just $4.6 billion to
reach 19 million homes by year-end 2008, lacing fiber into
neighborhoods and using copper phone lines, already laid, to carry
video the last few thousand feet to homes. This means the AT&T network
won't be quite as fast or quite as fancy --but it will do. It will
get the job done.
A telco gone Hollywood, AT&T has signed distribution deals with more
than 300 cable channels. It has won approval to offer video in six
states plus ten other markets. It rolled out its new video service in
hometown San Antonio in June and, in some neighborhoods, snagged a
surprising 30 percent of homes; it just lit it up in Houston. It hopes
to be available to 1.9 million homes in 15 markets as the new year
unfolds. Video revenue, now a trickle at AT&T, could in a few years
hit $4 billion, including $2 billion in ad sales. "There's not much
growth in our business without a new product," Whitacre says. "Video
probably is that product."
AT&T's video ambitions will intensify as Whitacre closed the latest in
a string of big takeovers: the $86 billion buyout of BellSouth, the
last Bell standing. On Friday, he received the blessing of one last
holdout, the FCC. "It's a big, big milestone," he says, vowing to push
broadband services and digital video "much deeper into the American
public."
Since becoming chief executive in 1990, Whitacre has pulled off 13
deals with a combined price tag of about $290 billion, including
assumed debt (including the BellSouth deal). He started this buying
spree as chief executive of the former Southwestern Bell, the
unaccountably proud runt of the seven Baby Bells spun off from the old
AT&T monopoly that the government busted up in 1984. He has built the
regional utility into the renewed and renamed AT&T Inc., the largest
telecom company in the world, 28 percent bigger (in revenue) than
second-place Nippon Telegraph & Telephone.
Suddenly Wall Street -- harshly negative on telecom stocks since the
markets crashed in 2000 -- is impressed. AT&T's stock is up 44 percent
in the past year. Whitacre says it should be up even more. "Shoot,
even now it's way behind. It oughta be up 200 percent!" he says. "This
is a stock that sells way higher at some point."
That surge and other strong metrics -- its sales grew 46 percent and
per-share earnings 61 percent in 12 months; its shares more than
doubled the return of Verizon's -- combine to make AT&T the Forbes'
Company of the Year for 2006. It is a bit of sweet vindication for
Whitacre, who was pilloried in the press for raking in $135 million in
a six-year period in which the company's stock price fell 48 percent.
"You beat up on me a lot. Everyone did," Whitacre says. Forbes gave his
board a grade of "D" in 2003, and in mid-2005 we put him on a "hit
list": "Why well-paid, underperforming execs should be worried." (Five
of the seven chief executives on that list no longer hold their jobs.)
He still smarts from a piece in the New York Times Magazine that ran
five years ago. The writer said Whitacre exemplified a stock-options
system "shot through with hypocrisy" and "gradual corruption." "You know
him?" Whitacre asks. "You tell him he's a sorry bastard." He grins.
The new AT&T, with BellSouth in hand, will possess a sweep and scale
that few imagined when Whitacre began. It will serve 90 million
accounts. It will have 68 million phone lines in 22 states, 12 million
high-speed Internet access users and 59 million customers nationwide for
Cingular (soon to be renamed AT&T). It will employ 300,000 people and
have 1.8 million shareholders. It will be one of the nation's largest
property owners, with 2,300 stores and a fleet of 35,000 trucks, each
one a moving billboard. This rebuilt juggernaut will have annual revenue
in 2007 near $110 billion and net income of $10 billion.
Wall Street worries that ever more copper-wire customers will quit and
switch to cellular, with its expensive transmission towers and
subsidized handsets. That may be overblown. This year the new AT&T will
generate enough cash flow from operations (net income plus depreciation)
to spend $16 billion on gear and capital projects, pay $5 billion in
dividends and buy back $7 billion of its own stock. Whitacre vows that
earnings per share will grow 10 percent or better for three years straight.
That will require Whitacre to mine new growth from all he has assembled
-- even as he mulls pursuing one last big deal. He is 65 and has 16
months left on his contract before driving his half-ton pickup truck off
into the sunset on his arid, scrubby ranch in southern Texas. His likely
heir, Chief Operating Officer Randall Stephenson, 46, is in place .
AT&T, Verizon and the cable giants thus finally are delivering on a
vision first conjured up in the early 1990s, when cable and telecom were
bent on breaking into each other's markets and consumers were wooed with
promises of 500 channels. "It was an idea before its time then," says
Whitacre.
Now its time has come, aided by the rise of the Internet and wireless
tech and the plunging costs of transmission and storage. "We're in
transport," Whitacre says simply, "and if you're good enough at it,
and ubiquitous enough, you can excel at it."
Maybe, but his path is rutted with a passel of imposing obstacles. In
six years AT&T's access lines are down 23 percent to 47 million
(though revenues grow because it owns the largest wireless carrier and
the largest broadband-access business). Cable rivals have raided 8.5
million homes for new phone service. And AT&T is in distribution, a
commodity business under unrelenting cost pressure; it owns scant
content, a higher-margin product that retains value even amidst
digital upheaval. Moreover, a fight over network regulation --
known by the tag "net neutrality" -- has broken out. Google and
other tech darlings want federal law to guarantee them a free ride on
AT&T's new network. With the comeback of the Democrats, AT&T could
face new rules intruding on how it prices newfangled services and who
gets the bill.
Similar hurdles have hampered this telco in the past. For years Wall
Street had been downright hostile to the acquisitive ambitions of
Chairman Whitacre. Its shareholders endured six years of disinterest
and disdain in the markets, which disliked the industry for myriad
maladies -- overcapacity, crashing prices, onerous regulation,
takeover turmoil, imperiled monopolies and a decline in local phone
lines for the first time since phone service began a century ago.
Says he: "I've always felt my back is against the wall."
When he began this journey, Whitacre had no idea he would end up where
he has. Once BellSouth is in place -- he had coveted it for years -- he
will have reassembled six big pieces of what the feds broke up 23 years
ago: four of the seven regional Bells, and the old AT&T's long-distance
business and cellular service. But even this reanimation came more by
happenstance. "Never thought about it," the laconic cowboy says.
He was born and bred in Ennis, Tex., 40 miles south of
Dallas. Whitacre joined the old AT&T's Texas subsidiary in 1963,
graduating from Texas Tech in Lubbock a year later. Southwestern Bell
split off from the old American Telephone & Telegraph Co. on Jan. 1,
1984; of the seven Baby Bells it had the fewest phone lines (10.3
million) and ranked sixth in sales ($7.75 billion). The Bell relied on
Texas for 60 percent of business, but the oil patch had gone bust,
banks were going under and real estate values were crashing. Six years
later, on Jan. 1, 1990, Whitacre, who started in hard labor and rose
through 20 jobs, became chief executive.
The digital crowd used to mock telephone company executives as
Bellheads. But this Bellhead grabbed first-mover advantage, plotted
strategy by gut and acted when the data confirmed his hunch. In late
1990 Southwestern Bell became the first Bell to invest outside the
U.S., paying $962 million for a 10 percent stake in Telmex, the
biggest telco in Mexico, controlled by billionaire Carlos Slim
Hel. That investment has grown to $10 billion, in the form of an
8.2 percent stake in Telmex, a 7.9 percent stake in its wireless
spinoff and $2 billion in equity sales -- plus 15 years of
dividends.
In 1992 Whitacre relocated the Bell from St. Louis, where it had been
for most of a century, to San Antonio, infusing it with cowboy swagger
and Texas-size ambitions. "The company needed shaking up; it had been
there for 100 years," Whitacre says. "You wanna say it's a new day,
but if you don't move, there isn't much stimulus to change your ways."
For their first decade, the seven Bells held state-granted monopolies on
local phone service and were banned, by federal consent decree, from
offering data services or long-distance calls. But in 1994 Southwestern
Bell joined three siblings to begin a legal effort to vacate the decree.
In 1995 the cowboy Bell rechristened itself SBC Communications to
underscore its broader ambitions.
Following the Telecommunications Act of 1996, the FCC began to force
open the Bells' local monopolies. On Mar. 1, 1996 Whitacre brought
together nine senior execs for a now fabled gathering in Ojai, Calif.,
telling them the telecom world had changed forever. Brace for
consolidation, he advised, for at the end a handful of giants will
reign over hundreds of small, narrow players. Focus on service,
compliance and costs.
To some his intent was clear: It was buy or get bought, and SBC would
be a buyer. "There's no doubt in my mind that, from the very beginning,
Ed wanted to create the strongest, deepest entity in all of telecom,"
says his chief dealmaker, James S. Kahan, 59, who was at the Ojai
meeting that day and has worked closely with Whitacre for 16 years.
Whitacre "is a survivor," Kahan says. "It's out of the question for
him to lose, to sell, to fail."
BellSouth, for one, said it would go it alone; it started out with 32
percent more phone lines than SBC had. "They were big; we weren't,"
Whitacre says . If SBC hadn't started a buyout binge, he goes on, "we
would've been gone, very quickly." He set out knowing he should buy
more access lines, invest in wireless and prepare for video. His first
deal came a few months after the Ojai pep talk: a $16.2 billion bid
for Pacific Telesis in California. Whitacre also flirted with the old
AT&T, a dalliance that died instantly when then FCC Chairman Reed
Hundt labeled an SBC - AT&T merger "unthinkable."
Then came Southern New England Telephone in 1998; Ameritech, the
midwestern Bell, in 1999, for $73 billion in stock; and the cellular
merger with BellSouth in 2001 to form Cingular. SBC was the bigger
company back then, and it held 60 percent of the equity. But Whitacre
-- against the advice of his cabinet -- gave BellSouth 50-50
control. One unstated motive: He saw, even then, that one day he might
want to buy BellSouth; SBC veterans are sure of this. "If I did know,
I wouldn't tell ya," Whitacre says.
BellSouth's chief then was (and still is) Duane Ackerman, and Whitacre
took a shine to his Sunbelt counterpart: "He's a good friend and a
great operator." Their relationship would be critical to pulling off
not one but two later deals for Whitacre's company.
As Cingular formed, SBC was snakebit. Tech stocks lost grace, and
telecom imploded. From early 2000, when the slump began, to year-end
2005, SBC stock fell 48 percent to $25. In this same six-year period
Whitacre earned $44 million in salary and bonuses, reaped $26 million
exercising options on 1.6 million shares and landed $65 million on
other items. Thus the towering Texan stuck out as an easy target for
critics of lavish executive pay.
The carping and his moribund stock gnawed at the white-maned Whitacre,
thick-skinned though he is. "I suffered every day. You bet I took it
personally," he says. "And I blamed the regulators; I blamed the
magazines; I blamed Selim [Bingol, his press spokesman]; I blamed my
wife. I kicked every dog in town." He didn't scream at his staff but
then, as one adviser says, "you're in more trouble when he kind of
lowers his voice."
The tech slump seemed unending, and onerous regulation made it worse.
The Telecom Act and the FCC forced the Bells to lease out phone lines to
rivals at prices far below cost. At one point SBC was losing 15,000
lines a day to resellers. In Chicago it was forced to sell a line for $5
a month when the real cost (so it figures) was $30; in Michigan it had
to hand over lines at $14 a month, half the real cost.
In 2002 Whitacre directed his chief financial officer, Stephenson, to
chop the company's $11 billion in capital spending set for the coming
year. Cut it to $5 billion, he instructed, and use the savings to
shore up the balance sheet because cheap assets will come up for
sale. Then they went on a PowerPoint road show, warning state
regulators about what the FCC had wrought -- and how that would hurt
jobs and capital spending in their states.
SBC lawyers had filed a lawsuit challenging some portions of the
Telecom Act soon after it became law, and the FCC pricing rules were
found to be illegal or flawed four times in three federal courts. The
FCC backed down in 2005. By then SBC had lost 7 million phone lines to
resellers, but Whitacre's takeover spree had started up again. "He had
a conviction that we will work through this," says James Ellis, 63,
general counsel and a Whitacre ally for 20 years.
In February 2004 SBC and Cingular partner BellSouth agreed to pay $41
billion for AT&T Wireless, in the largest all-cash deal in history. SBC
had socked away so much cash from budget cuts that it borrowed only
$8.75 billion of its share. The AT&T net, recently rebuilt, would mesh
smoothly with Cingular's. Whitacre consulted frequently with BellSouth's
Duane Ackerman, bonding them for the deal to come. "I trusted him; he
trusted me," Whitacre says.
He knew he also wanted to buy AT&T Corp. (the old long-distance
business, which had spun off wireless in mid-2001) and
BellSouth. "There was never a question" of whether to do the deals;
"It was in what order," says Stephenson. Do it in the wrong sequence,
and regulators, politicians and consumer activists might shout down
AT&T's empire building.
Some of Whitacre's advisers wanted to take on the biggest deal first --
the buyout of BellSouth. Whitacre demurred, deciding to begin with AT&T
and AT&T Wireless; their smaller scale wouldn't set off as many alarms.
SBC and BellSouth closed the AT&T Wireless purchase in October 2004,
getting it done in just eight months, and Cingular set plans to absorb
it and kill the AT&T brand. In late 2004 and early 2005 bankers for SBC
and BellSouth discussed merging, but they got nowhere. On Jan. 30, 2005
SBC agreed to pay $16 billion in stock for AT&T Corp. What an FCC
chairman had once dismissed as "unthinkable" now looked more like a
rescue: The old AT&T had just abandoned the consumer market, and its
revenue was declining 10 percent or more a year. Had Whitacre succeeded
in buying it back in 1996, the price would have been far higher.
But AT&T Corp. had $24 billion a year in sales, a stronghold in
corporate accounts and outposts in 127 countries. It will let the old
SBC avoid more than $400 million a year in fees it now pays rivals for
long-distance calls it can't complete on its own. And then there was the
AT&T brand name. "It was a little battered, but it's a powerful
worldwide brand. It still had status overseas," Whitacre says.
SBC, by contrast, had been marketing its brand for a decade, but many
people didn't know the name, and some thought it was short for
Southern Baptist Conference or Seattle's Best Coffee. And so on
Nov. 18, 2005 SBC closed the buyout of AT&T Corp., getting it approved
in less than ten months, and changed its name to AT&T Inc. On Dec. 1
it revived the renowned "T" stock ticker symbol, 20 months after it
had been dropped from the Dow Jones industrial average.
A month later Ed Whitacre began wooing Duane Ackerman and BellSouth.
Through an intermediary he offered 15 percent over BellSouth's recent
price; Ackerman said that wouldn't be enough. A day later Whitacre and
Ackerman met directly, and Whitacre suggested a premium of 15 percent
to 20 percent. It would have to be at least 20 percent, Ackerman told
him. By March they had a deal at the 20 percent premium. The
BellSouth chief has sought no role at the combined company and instead
will leave with $9.2 million in cash and $37 million in stock.
The BellSouth deal has been cleared by regulators in 18 states and by
the U.S. Department of Justice. On Friday, Whitacre received word on
the final milestone, approval from the FCC. He already is eyeing one
last big takeover, some of his associates believe. Blunt and
plainspoken to a fault, he equivocates uncharacteristically when asked
about it. "For me, I think I've assembled what we need going forward,"
he says. Yet instantly he invokes the "never say never" cant. "Things
happen."
On Wall Street 18 brokerage firms now have a "buy" on AT&T -- New!
Improved! -- and that is up from 10 a year ago. AT&T's stock price is up
39 percent in two years (Verizon's is down 6.5 percent), and that makes
up for some, but not all, of the ground that Whitacre lost earlier in
his tenure. Whitacre insists, quite volubly, that his share price is far
short of what it ought to be. AT&T is the only Bell to raise its
dividend every year since 1984; since 2000 it has paid out $23 billion.
In a lethal market it is surviving and then some.
By God, we have faith in this company, and we ought to let
shareholders know," Whitacre says. "We're in this for the long haul;
we're in the right, but it's hard." This comeback is not yet complete,
not for himself or for his shareholders, Whitacre allows. "No, but
it's damn good. It's a lot better.
Copyright 2006 Forbes.com
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Dennis Kneale, Forbes (forbes@telecom-digest.org)