Telecom titans teetering as stocks sink

How do you go from being a Wall Street darling to a virtual pariah in less than two years?

C. Michael Armstrong, Bernie Ebbers and William Esrey could tell you. For the chief executives of AT&T, WorldCom and Sprint, respectively,

Three telecom kings   Who: C. Michael Armstrong  Position: AT&T chief executive  Age: 62  Joined AT&T: 1997  From: Hughes Electronics, a subsidiary of General Motors  Reputation: turnaround wizard  Known for: converting AT&T into the nation's leading cable company Who: Bernard Ebbers  Position: WorldCom chief executive  Age: 59  Joined WorldCom: helped found in 1983, assumed current position in 1985  Former: chain-motel owner and basketball coach  Known for: aggressive acquisitions Who: William Esrey  Position: Sprint chief executive  Age: 60  Joined Sprint: 1980, named CEO in 1985  From: Dillon Read, AT&T  Known for: moving Sprint into the long-distance market and building the first digital fiber-optic network in the United States

it was relatively simple: Overextend in new markets, overreach with new acquisitions, and underestimate the erosion of core businesses.

In the last several weeks, all three executives have scrambled to reshape their companies to stem the loss of revenues in residential long-distance service and point the companies in new directions,

Telecoms in disarray? Don Luskin, CEO, MetaMarkets.com

such as data services and wireless. Yet the companies' stocks still are trading around 52-week lows, and investors seem skeptical not only in the restructuring strategies themselves, but in the abilities of these three executives to pull off the turnarounds.

"This has been a miserable year" for the long-distance sector and its CEOs, said Hilliard Lyons financial analyst David Burks. "Virtually everything that could go wrong has gone wrong."

And things don't appear like they'll be looking up anytime soon. Analysts reacting to the restructuring plans of the telecom giants note that none of them will produce quick results, and thus there's no reason to believe their stocks will turn around anytime soon.

Cleaning up the mess
Standard & Poor's said Tuesday that AT&T's credit ratings likely will face cutting beyond what the agency did Monday. That day S&P sliced AT&T's long-term credit and debt ratings two notches to A from AA-minus.

AT&T has vowed to sell off assets to reduce its debt, and Wednesday its general counsel Jim Cicconi wrote to the Federal Communications Commission suggesting that one such asset--the minority stake in Time Warner Entertainment (TWE) AT&T acquired when purchasing the MediaOne Group--can't be sold without Time Warner's cooperation. Cicconi, disputing Time Warner's claim that there are no obstacles to such a sale, asked the FCC to remove barriers to AT&T's sale of that stake by applying conditions to the merger of America Online and Time Warner.

AT&T and WorldCom are also facing class-action suits from disgruntled shareholders as a result of their latest earnings announcements, although some analysts caution that such actions aren't unusual when a company hits a rough patch.

If any of the boards of these three companies are discussing the termination of their chief executives, they've done it quietly. In talks with analysts and reporters during the last two weeks, Armstrong, Ebbers and Esrey all suggested they weren't going anywhere. However, they all were willing to admit to imperfections. Ebbers, surprising some, struck the most humble note.

The boards are quiet, and there also doesn't appear to be a strong desire on Wall Street to go on the warpath looking for scalps.

"These guys are flexible," said Jupiter Media Metrix analyst Joe Laszlo, and they may be the best individuals to lead their respective restructurings. In addition, Laszlo and others noted that it's not easy to govern such large companies with diverse business offerings in an ever-changing industry such as telecommunications.

Drake Johnstone, first vice president and analyst for the investment firm Davenport & Co., suggested that because these three leaders have been "brought down to earth," they might be able to offer more to their companies in the future.

Sentiment has been much harsher on various Internet newsgroups and chat rooms related to investing, where frustrated shareholders have called for the termination of all three leaders.

Waiting in the wings
All three executives realize there are capable individuals out there who could replace them. None realizes that more than Armstrong, who sits on AT&T's board with a potential successor, John Malone.

Malone is chairman of AT&T's autonomous subsidiary Liberty Media, and he used to head Tele-Communications Inc., the cable giant AT&T swallowed up two years ago. As a result of that purchase, Malone is AT&T's largest individual shareholder. As a man who has built a career out of maximizing shareholder returns, he has been less than pleased with the returns on his AT&T stock.

A source close to Malone insisted that the Liberty chairman is only concerned about increasing the value of AT&T stock, and that he has no interest in succeeding Armstrong at AT&T.

Still, Malone was quite visible several months ago in pressing the case for reform, pairing with an old friend from the cable industry who is also on the AT&T board, Amos Hostetter. Hostetter was the former head of Continental Cablevision, which became MediaOne. He was the one who paired AT&T with MediaOne, steering the cable company away from Comcast, the first media giant to make a bid.

Sources in the cable industry say Hostetter has told friends he is now questioning the wisdom of that decision.

One thing is clear: The terminology once used on Wall Street to describe Armstrong, Ebbers and Esrey--gurus, management icons, New Economy leaders--seems to have fallen out of fashion.