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Missteps may doom AT&T chief

SHARE Missteps may doom AT&T chief

C. Michael Armstrong, chairman of AT&T, may be wondering just how Vision No. 3 would suit him.

Vision No. 1, outlined shortly after he took the job in late 1997, was that AT&T was going to become the unified one-stop shop for all of a household's communications needs.

Vision No. 2, outlined last fall, was that AT&T would split into three separate companies with four separate stocks, all the better to build "shareholder value."

With Sunday's unsolicited offer from Comcast Corp. to acquire AT&T's recently constructed cable empire for $44.5 billion in stock, Vision No. 3 is creeping into view. It is a vision of a company that did not stay the course when the going got tough, succumbed to the trendy, and then saw even its reversal upended by the cold logic of dollars and cents.

It is not a pretty vision.

For AT&T and Armstrong, a sale of the company's cable systems to Comcast would be a deflating denouement to Armstrong's tenure at the company's helm.

It is a tenure that began with bold vision and immense hope for the reinvigoration of one of the nation's most august corporations, but which has run into shoals of bad luck, suspect decisions and perhaps even a touch of hubris.

The upshot is that if the final chapter of Armstrong's professional story is defined by a sale to Comcast, he will have only himself to blame.

After assembling the broadest collection of assets that any communications company has enjoyed since the original Ma Bell broke up under legal pressure in 1984, Armstrong essentially caved in to short-sighted investors and board members last fall and announced the restructuring plan.

That cannot be the legacy that Armstrong originally wanted to leave: the man who broke up AT&T again. But at least he can act as if the restructuring plan is the legacy of his choosing.

Now, he will have his hands full just keeping that plan on track. Last December, it said here that "it would be a major sign of stability if the company was able to complete its recently announced breakup plan on schedule and without major revision." The stability is gone. Now, the plan's success would be a major sign of Armstrong's fortitude.

But it was the breakup plan itself that invited Comcast to strike. When Armstrong said, wrongly perhaps, that AT&T's cable operation would be better off apart from the company's wireless and telephone operations, it was an open invitation to opportunistic businessmen like Ralph and Brian Roberts, who run Comcast.

Comcast's pitch to AT&T and its shareholders can be summarized succinctly and powerfully: We can afford to offer you a nice price for your cable operations because we can run them better than AT&T has. Brian L. Roberts, Comcast's president, and Stephen Burke, an executive vice president, did a fine job of articulating their case to investors at a meeting in Manhattan on Monday.

And the numbers don't lie (in this case). Comcast has a stellar track record of integrating acquisitions and running a tight, highly profitable cable ship. AT&T does not.

The quick reaction among investors Monday seemed fairly positive for Comcast, despite the sell-off of the company's shares. Without rushing to judgment, a fair number of institutional investors said on condition of anonymity that they thought Comcast was on the right track.

Nonetheless, the hurdles remaining for Comcast are formidable.

First of all, AT&T's board does not appear to have a legal responsibility to consider Comcast's bid. Mostly, that is because Comcast has bid for only one part of AT&T. In addition, AT&T has not committed to selling that unit at all.

So AT&T could just say "No," and there would not be much that Comcast could do about it, at least right away. Comcast would have to persuade AT&T's shareholders to reject the company's plan to issue a tracking stock for the cable operation as a precursor to the unit's full spin-off. That vote is scheduled to take place by September.

But AT&T is almost certainly not going to simply say, "No." The company is likely to spend the next several weeks evaluating the proposal and may very well tell Comcast how it would have to alter the offer to make it acceptable.

If only to let AT&T save some face, it is close to a foregone conclusion that Comcast would have to sweeten the financial terms of the deal by adding at least a dollar or two to the $12.60 worth of Comcast stock that it offered AT&T's shareholders for each share of AT&T that they already own. AT&T may also ask Comcast to add cash to its offer and protection in case Comcast's shares decline precipitously.

There would not appear to be any serious regulatory problems with a potential Comcast-AT&T cable deal, partly because a key federal rule limiting the size of cable companies was struck down by a federal court earlier this year.

So assuming that Armstrong has accepted the fact that he would not have a significant role in the merged company, the negotiating issue may come down to the Roberts family's voting stock.

Now, the Roberts family owns only about 2 percent of Comcast but under a two-tiered share structure it controls 86 percent of the votes at the company. Under Sunday's offer, the family would control around 42 percent of the vote at the combined operation while owning no more than 1 percent of the company.

That is not much of an issue for institutional investors, who have made plenty of money on Comcast's nonvoting stock. But it is an issue for AT&T's board. In particular, that issue may stick in the craw of Amos B. Hostetter, a cable baron who now sits on AT&T's board and who is thought to resent the Robertses' stranglehold on Comcast's voting stock.

The wild card in this process may be the entry of another company into the bidding. Cox Communications or Charter Communications, which is controlled by Paul Allen, a co-founder of Microsoft, could jump in. Microsoft itself should be interested in the cable business, but that company is already an investor in Comcast. (If AT&T demands cash from Comcast, it could very well come from Microsoft, which has billions in cash on hand.)

AOL Time Warner would surely like AT&T's cable systems. The question there is whether such a deal would make the already intense regulatory scrutiny of that company altogether unbearable.

A dark horse would have to be Disney. Michael Eisner has said recently that his company has scant interest in acquiring cable systems, but chief executives have been known to change their mind quickly when an opportunity arises.