AT&T UNPLUGS A CEO-TO-BE

By Jill Smolowe

It began decorously enough, given the indecorous business at hand. In a telephone (naturally) press conference, AT&T outside director Walter Elisha patted company president John Walter on the back for having made "important contributions" to the feckless phone company. Then Elisha stuck the knife in: "The board has decided it will not elect him CEO...therefore, John has decided to leave the company."

Since Elisha had just dispatched the heir apparent of the nation's seventh largest company, his attempt to avoid explaining the dismissal was akin to a man trying dodge raindrops in a downpour. Questioned persistently, he finally said Walter lacked "intellectual leadership," then paraphrased Mark Twain: "The difference between president and vice president is like the difference between lightning and a lightning bug." Within hours, Walter's attorney, Bob Barnett, was holed up with AT&T executives, negotiating a golden goodbye. Walter is owed some $25.8 million under the terms of his contract.

Once a telecommunications monolith, the AT&T Corp. (1996 sales: $52 billion) is looking increasingly like a monolithic screw-up. This year alone the company has lost $12 billion in market value. Walter's exit, only eight months after he was plucked from R.R. Donnelley & Sons following a high-profile executive search, is the latest in a series of blunders that have cost AT&T in lost business, a slow leak of top executives and a falling stock price. Last August, Walter's predecessor, Alex Mandl, resigned after a seven-month tenure, similarly frustrated in his quest to become CEO.

Walter's departure leaves AT&T in the hands of CEO Robert Allen, whose tortured leadership of Ma Bell ignited the search for a successor. His nine-year tenure has been marked by some seemingly desperate attempts to expand beyond telephones and phone service, including the failed $6 billion acquisition of computer maker NCR Corp., the pricey buyout of McCaw Cellular ($13 billion) and some high-profile product failures. NCR, which lost billions, was spun off in last year's "trivestiture." Another castaway, the manufacturing arm now called Lucent Technologies, has been on a tear since leaving Allen's hold.

Most recently, Allen bigfooted Walter out of the way to explore a merger with SBC Communications, Inc., the largest of the regional Bells. The talks collapsed amid unofficial hints from FCC chairman Reed Hundt on the order of "Are you nuts?"

It's not unusual for a CEO to want to stick around or make life miserable for a named successor. Yet, says Robert Kavner, another top executive who left AT&T, "Bob is not a punitive person; he's not egocentric. This is about something of substance."

But having twice demonstrated his inability to groom a successor, Allen is now part of the problem. "Bob Allen is a caretaker when the company needs a visionary," says Scott Cleland of the Legg Mason Precursor Group. "The company has lost a year and a half in setting the direction for the next millennium."

The most glaring oddity in this drama is that Allen hand picked Walter, who boasted a strong sales background but no telecom experience. Yet he was attractive because he accepted Allen's demand to stay on until January 1998. "The best people are already running large companies and do not want to wait before taking over," says an executive familiar with the search.

Within weeks of arriving, Walter told the Wall Street Journal that he hadn't joined AT&T "to be No. 2." Blocked by Allen from importing his own deputies, Walter moved aggressively, relying on his salesman style to win new allies. His extensive meetings with AT&T employees and corporate clients buttressed morale, as did his promotion of several insiders. But along the way, Walter lost sight of the only constituency that mattered: Allen. Last April after Walter, not Allen, got the call from SBC's chairman proposing merger talks, Allen escalated his criticism, telling AT&T directors that Walter didn't grasp the complexities of the telecom business. By the time Walter faced the board to defend himself, its decision had been made.

Now AT&T has to reach out and tap someone. This time, the board will conduct its own search, and the new CEO will take over pronto. The top inside candidate is John Zeglis, AT&T's vice chairman. A swift choice would provide an ironic coda: by hastening Walter's departure, Allen will have hastened his own as well.

--Reported by Thomas McCarroll/New York and Adam Zagorin/Washington

With reporting by THOMAS MCCARROLL/NEW YORK AND ADAM ZAGORIN/WASHINGTON