Windup for Two Supersuits

By Christopher Byron

The Justice Department ends its antitrust cases with A T & T and IBM

They were two of the biggest, most complex and costliest corporate legal actions ever brought by the U.S. Government. Rightly or wrongly, they came to symbolize the relentless meddling that businessmen everywhere had learned to fear most from Washington. Then last week, after years of litigation and without any fanfare or warning, the twin legal dramas came suddenly to an end.

In Washington, Assistant Attorney General William Baxter, who nine months earlier had declared his intention to "litigate it to the eyeballs," announced that the Justice Department had reached an out-of-court settlement with A T & T. That ended the Government's seven-year antitrust pursuit of the world's largest corporation (1980 revenues: $51.7 billion). Under the agreement, Ma Bell--as the giant communications company is popularly known--will divest nearly two-thirds of its total assets by spinning off 22 local operating companies. But at the same time, it will retain its long-distance services and be able to enter new fields of data processing and telecommunications.

Later that same day, in New York, another Justice Department official appeared before a Federal District Court judge to declare that the Government was abandoning its 13-year effort to break up International Business Machines, the world's largest and most powerful computer-manufacturing company (1980 revenues: $26.2 billion). Said Baxter in Washington of the IBM suit: "The case is without merit and should be dismissed."

The two announcements come at a time of intensifying ferment in both industries, and the inevitable effect will be to spur even more competition, change and upheaval. For years, IBM and AT&T have warily circled each other, sensing that each is dominant in a market that holds enormous promise for the other. Since the '60s, the once distinct worlds of data processing and communications have increasingly fused together into a vast new megamarket. Computers a continent apart communicate with each other over telephone lines and via satellite transmissions. Meanwhile, the elaborate multibillion-dollar telephone networks that make such communications possible have grown dependent on computers to function.

At a minimum, the Justice Department's actions will now encourage the two corporate titans to battle each other directly for a share of the valuable and explosively growing business. The settlements will also spur increased competition among companies already jockeying for position within various telecommunications and information-processing markets. Recently, for example, AT&T asked permission from the Federal Communications Commission to set up a long-awaited coast-to-coast network of video-screen teleconferencing centers. These will use computer and telecommunications technology to enable businessmen to confer with colleagues and clients in distant cities.

Politically, the announcements amounted to a strong reaffirmation of the Reagan Administration's approach to antitrust policy. They made it clearer than ever that large corporations no longer need fear the wrath of Washington simply because of their size.

But the two cases did not represent a cave-in to business. In the AT&T settlement, the Government basically won its case. The final agreement was very close to what the Justice Department has been seeking all along. When asked at a press conference precisely how the settlement differed from what the Justice Department had been demanding, Baxter, a soft-spoken former Stanford University law professor, hesitated. Then AT&T Chairman Charles Brown, who was standing next to him on the podium, leaned to the microphone and declared, "I will answer that for Mr. Baxter. It is exactly what the Government wanted. He is just too modest to say so."

Baxter was the architect of the two settlements. A T & T in recent weeks became firmly convinced that it had little hope of winning its case against the Gov ernment. A few days before Christmas the company officially told a Justice Department lawyer that divestiture might be the best available alternative. There then followed, as negotiations picked up speed, at least 13 separate draft proposals for a settlement. At the same time, Baxter was concluding his review of voluminous material concerning the IBM case and had decided that he would drop the Government's action against the company. When Baxter flew off for a six-day skiing vacation in Utah on New Year's Eve, the cases seemed set. From a telephone at the Three Kings Condominiums in Park City, Utah, Baxter kept track of the progress of the talks. He arrived back in Washington last week just in time to make the historic announcements.

Last week's actions were a welcome end to a seemingly endless litigation nightmare that had enmeshed both the Government and the defendants for so many years. As the two cases progressed and the companies struggled to defend themselves against Washington's charges, whole warehouses filled up with paperwork, armies of attorneys found steady employment, and cumulative corporate legal fees climbed into the hundreds of millions of dollars. The AT&T case alone cost the company an estimated $360 million and the Government $15 million. After the settlement was announced, AT&T President William Ellinghaus said, with a sigh of relief, "One of the most important things is that the suit itself is now settled. It has been hanging over our heads and those of our shareholders, creating uncertainty that was going to stay on for years. Eliminating it will help a great deal."

Under the terms of the settlement, AT&T, which until now has controlled 80% of the U.S. telephone market, will sell its local operations. The company agreed to undertake a corporation-wide reorganization and divest itself, within the next 18 months, of its 22 operating companies. These include such firms as Ohio Bell, Pacific Telephone and New York Telephone. The divestiture will not immediately require raising new capital or issuing new stock. Holders of A T & T shares will simply obtain stock in the new companies.

The firm, though, will still retain its more profitable long-distance service, its manufacturing arm, Western Electric, and the Bell Telephone Labs. Said Ellinghaus of the terms: "This was not our idea. We fought hard to keep the system intact. But the public has made it very clear that it wants more choice and more competition in the business."

One result of the settlement is that the price of local telephone calls in many parts of the country could begin to rise sharply over the next few years, while long-distance calls may get cheaper. Reason: long-distance service requires less investment to maintain, and competition in the market will now intensify from smaller and newer firms.

Last week's decision will change many familiar ways of doing business with the phone company for Americans. Said Ellinghaus: "If you need a new telephone in your home, you could ask your local phone company to install the service. Then you could go to the phone store, or another merchandiser, and order the equipment. You will be buying your equipment rather than leasing it."

For AT&T, the net effect of last week's action will be a slimmed-down but still titanic business enterprise that should improve its profit margins and draw a higher return on investment. To prevent a speculative surge in the stock following the announcement, officials of the New York Stock Exchange blocked trading in AT&T last Friday. Said one Wall Street analyst of the settlement's terms when they finally became known: "We cannot yet tell for sure where this is going, but I have a feeling that it is going to be a very, very big plus for AT&T."

The Justice Department filed the suit against A T & T in 1974 during the Ford Administration. It charged Ma Bell with violating a 1956 consent decree that had settled an earlier Justice Department antitrust action against the company. Under the terms of the 1956 settlement, AT&T was permitted to retain ownership of Western Electric, but it agreed at the same time to restrict its future business activities to local and long-distance telephone services.

Later, a panoply of computer-age businesses in communications and data processing grew up that Bell could not enter. When upstart competitors like Washington, D.C.-based MCI began connecting their own equipment to AT&T transmission lines and going into business for themselves, Bell tried to block them. The Justice Department then charged that the company had conspired to monopolize telecommunications services in the U.S., a violation of the Sherman Antitrust Act of 1890.

Last week's settlement was silent on whether AT&T in its truncated form will be permitted to plunge into such hot new fields as information processing and data transmission. A 1980 ruling by the FCC allowed the company to compete in those markets if it created a subsidiary. The firm is in the process of doing this, and the new entity has already been dubbed Baby Bell. The offspring would compete head-on with giants like Xerox and IBM in the fast-changing world of information technology. Meanwhile, the Senate has already passed legislation that would clearly define the role of Baby Bell, and the House is expected to do the same. The new subsidiary could start business with assets of $18 billion to $20 billion, making it one of the 50 largest U.S. industrial corporations.

For IBM, the Justice Department action was nothing less than total vindication. On their very last working day in office in 1969, Johnson Administration lawyers filed charges against the company for monopolizing the computer industry. Through nearly 13 years of pretrial depositions, court pleading and other legal maneuvering, IBM executives have unwaveringly insisted on their company's innocence. Said the company's president, John R. Opel, after the decision was announced: "This is wonderful news as we start the new year. In effect, the Justice Department and the federal courts have now affirmed what we have contended from the start. Our industry is healthy and competitive, and IBM has not violated any antitrust laws."

As the battle dragged on, the Government's case against IBM became weaker and weaker. The computer giant's once overbearing presence in almost every aspect of the industry has steadily slipped. Though it still holds an estimated 68% of the $18 billion market for big mainframe computers that can cost several million dollars each, the firm has only a modest share of the rapidly growing market for smaller business computers that can run more than $100,000 and little of the small, but exploding, business in personal computers that cost about $3,000.

Newer firms, such as Amdahl, Magnuson and National Advanced Systems, have become strong competitors at the big end of the market. Digital Equipment, Data General and Datapoint are leading companies in the minicomputer part of the business. Meanwhile, such firms as Apple and Tandy are running away with the small-computer market. Indeed, IBM was late to recognize the potential of personal computers, and introduced its first entrant into the field only last summer.

The Japanese are also an increasingly important competitor at all levels of the computer market. Their firms now threaten U.S. dominance of the industry. The Government's case against IBM that was started in 1969 therefore seemed more and more anachronistic in 1982.

As with A T & T, the Justice Department's suit against IBM became a black hole that swallowed up corporate resources. By the time the actual trial began in 1975, some 5,500 pages of testimony had been gathered, and more than a dozen other companies wound up filing spin-off antitrust actions of their own against IBM, producing 66 million more pages of documents. Concedes Thomas Barr, a senior partner in the New York law firm of Cravath, Swaine & Moore, which managed IBM's defense and trained a whole generation of young antitrust lawyers in the process: "We made a lot of money on this case."

The conclusion of the two cases set an important landmark in antitrust law. Said Assistant Attorney General Baxter: "What we learned today is that a company that is large and has a large market share should be allowed to compete aggressively. Period." The giant A T & T was indeed abusing its privileged monopoly position and will be broken up. But the giant IBM has legally achieved its important position in the computer industry and will be allowed to continue in its present form. Last week's decisions will help strengthen competition in both the communications and computer industries. --By Christopher Byron. Reported by David Beckwith/Washington Frederick Ungeheuer/New York

With reporting by David Beckwith, Frederick Ungeheuer

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