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from: NY Times

AT&T Has Done the Deals. Now It Needs Results.
March 27, 2007

By MATT RICHTEL
Edward E. Whitacre Jr., the chairman and chief executive of AT&T, is captivating several hundred employees in an Atlanta auditorium with a pep talk about the rosy future of the world’s largest telephone company. His demeanor is commanding, cut with a practiced avuncular charm.

Then he opens the floor to questions and, for just an instant, is tripped up. The first question, from a man near the front row, is about whether AT&T’s much-debated strategy for deploying broadband on the cheap will give consumers what they need.

Mr. Whitacre begins to answer, pauses, chooses another path, then stops, and smiles. “Where did you get this question?” he finally responds, feigning exasperation with fine comedic timing, prompting an eruption of appreciative laughter.

It is a moment that sums up the new state of affairs for Mr. Whitacre and AT&T. In December, the company closed on an $86 billion acquisition of BellSouth, capping a string of multibillion-dollar takeover deals, and leaving the company ready and needing to compete through execution, not acquisition.

Wall Street is thus far charmed, having endorsed the acquisition strategy by sending the stock on a steady two-year rise to above $39 from the low $20s. And Mr. Whitacre, never a shrinking violet, has the swagger of a man whose grand plan has worked.

But there are nagging questions. Is AT&T’s broadband strategy flawed? Is its foray into television in shambles and destined for failure? Has the revenue growth from acquisition obscured more fundamental, underlying vulnerabilities?

“Mr. Whitacre is a very, very smart man,” said Dave Burstein, editor of DSL Prime, an online newsletter that follows the broadband industry. “He knows what he’s doing. He’s making good short-term decisions, and risking the long run.”

Mr. Whitacre has plenty of promoters, who credit him with transforming Southwestern Bell, the smallest of the seven Bells when he took it over in 1990, into SBC, the telecommunications giant that swallowed AT&T and took its name. For his part, the 65-year-old Mr. Whitacre — a native Texan and company man who started as a facilities engineer with Southwestern Bell in 1963 — says the heaviest lifting may at last be done.

“I’ve always been trying to put all the pieces together,” he said. “We’ve got them now.”

The drama for AT&T is what happens now that it has all those pieces in place — now that, it seems at last, Mr. Whitacre is sated.

In late 2005, a year before the company closed on the BellSouth deal, it completed the $16 billion acquisition of the AT&T Corporation. A year before that, Cingular Wireless, jointly owned by SBC and BellSouth, closed on a $41 billion acquisition of AT&T Wireless. In the late 1990s, Mr. Whitacre’s company acquired Pacific Telesis, Southern New England Telecommunications and Ameritech.

The new AT&T has 66.5 million land-based telephone lines, 61 million wireless subscribers, 12 million broadband lines, and sells local phone service in 22 states. It has 302,000 employees, including the several hundred acquired from the BellSouth and Cingular acquisitions who gathered in Atlanta for Mr. Whitacre’s recent pep talk.

AT&T’s $242.77 billion market capitalization by far surpasses that of the next largest phone company, China Mobile, at $ 183.13 billion, and is double that of the nearest American competitor, Verizon Communications, at $109.62 billion. “The company’s come a long way — largely on Ed Whitacre’s vision,” said John C. Hodulik, an analyst with UBS. “Right from the beginning, he realized the benefits of scale in the telecommunications business.”

Investors have been impressed, too, by the cost savings AT&T has generated after its acquisitions. The company initially projected that it would save $15 billion by merging with the former AT&T, but it saved $18 billion. It had initially said that it would save $18 billion through the BellSouth merger, but in January it upgraded that estimate to $22 billion.

Randall L. Stephenson, AT&T’s chief operating officer, said that the integration was carried out in each case more swiftly than projected, allowing the savings to accrue earlier.

“Speed is the No. 1 thing,” Mr. Stephenson said. “Our core competency has been doing exactly this: buying companies and integrating them quickly.”

The savings have improved the company’s margins, said Qaisar Hasan, an analyst with Buckingham Research. He said that in the fourth quarter of 2006, margins hit 34.4 percent, up from 23.4 percent in the fourth quarter of 2004.

The results have created “widespread enthusiasm” on Wall Street, Mr. Hasan said. So much so that Mr. Hasan in September downgraded AT&T stock to a hold.

“There’s not much room for the stock to surprise on the upside,” he said.

There are Wall Street analysts who disagree. Simon Flannery, an analyst with Morgan Stanley, titled his January report on AT&T “Time for an Encore; More Upside in 2007” and said the company remained his favorite large-capitalization stock.

But there is potential downside for AT&T, too, analysts said, particularly when it comes to its closely linked broadband and television strategies. Some analysts say that AT&T has set itself up poorly to compete in those areas, which are considered essential to the telecommunications product bundle.

In the case of TV, the strategy is called Uverse, and it entails delivering programming over the Internet, so-called IPTV. But the service has been plagued by delays and glitches and, even now, takes, on average, more than six hours to install in a home.

“If it cannot be called a complete failure, it’s at least struggling,” said Phillip Swan, president of TVPredictions.com, a Web site that tracks the television technology industry. He said that if things did not pick up soon, AT&T might have to get back into the acquisition game to buy a TV distributor, like a satellite or cable company.

Mr. Whitacre declines to comment about such a purchase. But he and other executives say Uverse needs a chance to flourish and, they say, it is an essential piece of the company’s overall strategy.

The television initiative is tied in closely with AT&T’s strategy for deploying a high-speed fiber optic network, which will deliver the TV programming. That strategy is called “fiber to the node” because it brings high-speed fiber optic cables within 4,000 feet of individual homes. Then it delivers the last part of the digital signal over conventional copper wires.

That strategy stands in contrast to “fiber to the premises,” a strategy being pursued by Verizon, which entails connecting fiber optic cables directly to individual residences.

There are pros and cons to each strategy. Verizon’s version of fiber to the premises allows it to give customers data speeds of 100 megabits, while AT&T’s can deliver around 25 megabits. On the other hand, AT&T’s concept is projected to cost $5.1 billion — $15 billion less than it says it would cost to lay fiber to the premises.

The question of which strategy is ultimately superior depends on how much bandwidth customers will need in the future.

“It’s an outstanding question for everybody in the industry,” said John T. Stankey, president of the network operations support group at AT&T. “The question for us is whether we’re investing enough. The thing I go home thinking about at night is, What is the amount of bandwidth the customer is going to need in the future?”

For Mr. Whitacre, the answer is that AT&T’s strategy is the right one, unequivocally.

It’s a “no-brainer,” he said. He asserts that as technology improves, AT&T will be able to increase its speeds from 25 megabits without facing the expense of laying fiber to every household. “I have no doubt that the bandwidth will be plenty large,” he said.

The results may play out after Mr. Whitacre is no longer in charge. His term as chief executive ends in March 2008, and while the company has not announced whether it might renew his contract, there is speculation among analysts that he will take the title of chairman and move away from day-to-day control.

But he was plenty engaged during his pep talk in Atlanta, as he ran down the company’s accomplishments. The meeting exhibited his Reaganesque style: big-picture commentary, a statesmanlike presence, humor and down-home patter.

He told those assembled that he understood how much change the acquisitions had wrought, and that it was causing turmoil and confusion in the short run.

“It ain’t exactly easy to get things done around here,” he said. “I hate it. Don’t y’all hate it?”

A few sentences later, he got another round of warm laughter when he added, “ ‘Ain’t.’ That’s a new word in the dictionary, isn’t it?”

His chief request to the audience was to make nice with customers, when offering assistance or closing a sale.

“I’m asking you, I’m pleading, don’t let them go until they’re happy,” he said. “You just can’t let them go. Hang on till it’s done.”

Generally, Mr. Whitacre seemed at pains to connect with the common worker. But that common-man persona is at odds with his compensation, which has drawn criticism from watchdogs in recent years. The compensation included stock options worth tens of millions of dollars, even during the telecommunications downturn.

A proxy filing last week showed Mr. Whitacre’s 2006 pay at $31.5 million, not including deferred compensation, about 94 percent more than in 2005. AT&T shareholders earned 53 percent more than in 2005, including reinvested dividends.

In an interview after his pep talk, Mr. Whitacre said the critics failed to realize the extent of the post-bubble downturn and everything he did to keep the company from faring worse. It was during that time, too, that Mr. Whitacre continued to push his acquisition strategy, telling Mr. Stephenson, his chief financial officer at the time, to get rid of the company’s debt so that it could go on a buying spree, Mr. Stephenson said.

Now that the pieces he says he sought are in place, will Mr. Whitacre depart as chief executive? He declined to say, but he did say that if he were to choose retirement, he knows what he would do with it.

“Take more time to breathe,” he said.

Eric Dash contributed reporting.