The Deal of the Century

by Coll, Steve;

  Howard Trienens had already arrived and was seated in one of the two chairs facing Brown’s desk. Block sat down in the other. There was no sly grin on either Brown’s or Trienens’ face, no look of pain or weariness or relief or joy. They were utterly, even defiantly unemotional.

  And then Charlie Brown asked, “Ed, I want to know if we could satisfactorily and plausibly explain ourselves if I should decide to accept the government’s terms for a consent decree settlement—complete divestiture of the operating companies?”

  Block kept his balance. He knew that some of his colleagues had been working that fall on the concept of a full inter-intra split, but he had no idea that such a radical decision was being seriously contemplated by the chairman. Brown’s question was shocking. A year earlier, during the Crimson Sky negotiations, Block had done some thinking and some work on how a settlement with Justice could best be sold to AT&T’s one million employees, three million shareholders, and the public. But that deal—three operating companies and a piece of Western in exchange for a clear and certain industry future and an end to the phone company’s legal entanglements—would have been an easy sell. A deal that sacrificed two-thirds of AT&T’s assets and resulted in the total dissolution of the national phone network would be quite a different challenge.

  Block began to think on his feet. The key, it seemed to him, was that when the announcement was made, the story had to be told one time, one way—AT&T’s way.

  “It’s very important to simultaneously announce it with the Justice department,” Block said. He envisioned a “sword surrendering” ceremony with Baxter and Brown both present. Otherwise, in the media frenzy that would inevitably erupt after the announcement, reporters would bounce back and forth between sources at Justice and sources at the phone company. The story would become muddled, contradictory. Whatever message AT&T hoped to convey would be lost.

  And precisely what message did Brown hope to sell? That would be Block’s job, in consultation, of course, with Trienens and the chairman.

  “Obviously, we cannot make the decision until I am convinced that it can be explained,” Brown said.

  In just fifteen minutes, Block had received his instructions. He was to breathe word of this to no one—not a soul. He would have to work alone, at home, at night, and on weekends. He would even have to do his own typing. His assignment was to devise and prepare a full-scale public relations strategy that would successfully sell the breakup of AT&T, so long decried by the phone company as a kind of industrial Armageddon, as a reasoned, even savvy decision of benefit to the company’s shareholders and the public. Time was of the essence. On Friday, December 11, Trienens was flying to Washington to meet with Baxter and determine whether an immediate inter-intra split would be acceptable to the Antitrust chief. The following Wednesday, the 16th, AT&T’s board of directors was convening for its monthly meeting. At that meeting, Brown wanted to present them with the inter-intra divestiture proposal for ratification. Block agreed to begin immediately, and the meeting broke up.

  Suddenly, it had come to this.

  There was no moment of revelation, Charlie Brown said later, no instant of clarity or will that led him to decide affirmatively to break up the American Telephone & Telegraph Company. The decision was a continuum, he said. Throughout November and December of 1981, when he discussed the inter-intra split informally, or “off line,” with various members of his board of directors, Brown emphasized a kind of strategic fatalism about the idea. Regulation of the telephone industry had become like “a fence with a one-way hole,” he said, designed to let myriad competitors in while holding AT&T out. The 1956 consent decree with Justice, under which the phone company still operated, severely restricted AT&T’s ability to develop new kinds of business products that could blend emerging computer technologies with the phone network. Such products, melding voice and data communications, were at the center of Brown’s vision of an emerging “information age,” when businessmen would communicate with computers as routinely as they now talked on the telephone. The essence of Brown’s plan for AT&T, which had invented the old form of communication, the telephone, was to arrive in this new age of digital data transmission, satellites, and computer networks in the best possible strategic position. Until now, “best” had meant “in one piece.” At the FCC and in Congress, Brown had been working for more than two years to devise a regulatory formula that would allow AT&T, through Western or some other subsidiary, to sell computers and data communications products while at the same time retaining control over the national telephone network. That was the goal of S.898. It had been the goal of the telephone industry competition bill killed by Peter Rodino in 1980. It was the goal of a long and exceedingly complex regulatory proceeding at the FCC known as “Computer Inquiry II.” In each case, the problem of “cross subsidies” between the phone company’s local telephone monopoly and its new, competitive computer products—the same issue that was at the core of the Justice antitrust case—had been solved by regulation, not divestiture. AT&T would establish a “fully separated subsidiary” for its competitive computer products. The local telephone monopolies, as well as the newly competitive long-distance and phone equipment markets, would be governed by detailed federal rules enforced by the FCC. AT&T would arrive in the information age intact. Telephone service would continue to be provided by the company that did it best.

  That was Charlie Brown’s best-laid plan: the “A” plan. The one, he thought, that made the most sense for the phone company and the public. And the one that, on November 5, 1981, had been rendered seemingly impossible.

  On that day, the staff of Congressman Tim Wirth released a 435-page report titled “Telecommunications in Transition: The Status of Competition in the Telecommunications Industry.” The report was the long-awaited precursor to Wirth’s S.898 companion bill. It was a statement of Wirth’s policy and legislative priorities. And to Charlie Brown and Howard Trienens the report said, simply, that there was no longer any hope that an acceptable solution to the company’s problems could be forged in Congress; that, in fact, whatever happened on Capitol Hill was likely to compound the already dismal situation in Judge Greene’s courtroom.

  More than any other single event, Brown and Trienens said later, the Wirth report led them to pursue affirmatively the inter-intra split strategy that had been drawn and redrawn on Charles Hugel’s blackboard during the previous year. While its stated purpose was to lay a “firm foundation of fact” about phone industry competition, so that Wirth could better draft an S.898 companion, the report was actually more like a legal brief assembled to argue that unless new and more pervasive restrictions were placed on AT&T, competition in the phone industry would be just a pipe dream. More stringent protections for AT&T competitors than were contained in S.898 were needed, Wirth and his staff said. Rather than tearing down the fence with the one-way hole, Wirth intended to build it higher. Trienens had met with the staff, which was led by a lawyer named David Aylward, but he had left with the impression that Wirth considered AT&T immune to regulatory pain, that the congressman thought the phone company could overcome any obstacle thrown in its path. Indeed, so it had been for many years of the long and contentious relationship between AT&T and the U.S. government. Not this time, however. Trienens could see that AT&T’s myriad competitors were “buzzing around the Wirth staff, and they all wanted their little ornament on the bill.” By the time legislation was drafted, Trienens thought, it would be so debilitating that even another “Quagmire” sequel title probably wouldn’t do it justice.

  “The separate subsidiary by itself isn’t adequate protection for competitors, so other protections have to be built in,” Wirth told reporters while attacking S.898 early in November. “And you can’t entirely depend on the ‘expert agency,’ the FCC, because the expert agency isn’t very expert.”

  The Wirth bill, finally released on Thursday, December 10, confirmed Trienens’ worst fears. It required AT&T to develop new subsidiary configurations, legislated
tougher equal-access rules than even Baxter I and Baxter II, instituted procurement quotas for the operating companies, and generally attacked AT&T from all sides. By making unrealistic demands, Wirth had abandoned his brief leadership role in telecommunications policy making. In the course of just a few months, the mercurial subcommittee chairman had publicly declared his opposition to operating company divestiture—during his attempt at rewriting the Communications Act—then had written a letter to President Reagan urging that the Justice suit, which sought what Wirth opposed, not be dismissed, and finally had issued a report that scuttled the chances for a legislative solution to the whole mess. His contribution to the breakup of AT&T would not soon be forgotten by Charlie Brown or Howard Trienens.

  After it was all over, one of the AT&T executives who was informed early on of Brown’s decision to pursue the inter-intra split sat down at his typewriter and rapped out a stream-of-consciousness account of why his boss had done it. The document was meant to be a private primer about the decision for interested outsiders. But it had a peculiar, almost confessional tone about it, as if the author were still trying, years afterward, to make sense of his dizzying December experience.

  “Who can AT&T deal with to get a way out of the quagmire?” the executive wrote. “One person proposes a coherent antitrust theory, can make a deal and have it stick: Baxter. The omnibus ‘break it all up’ approach of Justice has gradually been replaced by a workable scheme, the dimensions of which offer AT&T a valuable commodity—reasonable certainty as to the future.

  “The shareowners can be protected, the Bell companies can survive it, and so can AT&T. Significantly, the court has now become by far the best option for a final resolution of issues that simply can’t wait any longer. Brown sees this as the best of a series of hard alternatives—one of the worst being to do nothing but continue to slug it out on all fronts. The Bell organization says we’ll do it and we’ll make it work and we’ll leave the philosophizing till later. Besides which, we’re not wimps. We want to compete and we want to demonstrate that we can. Offense is more fun than defense. This is a workable solution. Let’s take the initiative and put the destiny of the business back in the hands of management. Let’s get on with it. The monopoly was shattered a decade ago and whatever its merits—and shortcomings—our business is management, not politics, not industrial theology. Hooray for Charlie Brown …”

  And so it was that on Friday, December 11, a cold, overcast, and blustery autumn morning, Howard Trienens found himself winging to the nation’s capital to discuss the inter-intra split with Bill Baxter.

  Trienens had told Baxter nothing about his agenda when he called to arrange the appointment. His pretext for a visit was the ongoing Quagmire II settlement negotiations, which still showed no signs of nearing a conclusion.* The document outlining the Quagmire deal continued to grow longer and more complex. But as far as Baxter knew, it was the only deal AT&T was interested in making. So the Antitrust chief had continued to supervise the talks, and from time to time he and Trienens met to discuss their progress. At those meetings, Baxter would frequently joke, “You know, there are a lot easier ways to do this, Howard.” But Trienens generally ignored Baxter’s overtures about divestiture. He told the Antitrust chief that AT&T was still interested in trying to work out an injunctive settlement along the lines of S.898.

  The scene at Baxter’s office in the main Justice building when Trienens arrived that Friday morning was chaotic. The phones were ringing and secretaries and lawyers were running in and out. Trienens and Baxter tried to talk, but after a while Trienens suggested that they move over to the Madison Hotel for lunch. While the Justice trial was in progress, AT&T had rented an executive suite directly above George Saunders’, on the eleventh floor, its height an unintended symbol of the phone company’s legal hierarchy. Baxter agreed to go. It was the first time he and Trienens had ever talked about the AT&T case outside a Justice department office.

  At the Madison suite, which was as comfortable and well-appointed as Saunders’ below, the two aging and idiosyncratic lawyers both ordered club sandwiches from room service.

  Still, Trienens did not reveal the purpose of his trip to Washington. He had come to gather information, not make a deal with Baxter. Until Charlie Brown went to the board of directors the next Wednesday, there could be no negotiations. Trienens and Brown were both confident that the board would approve the inter-intra split plan. The board had been kept well-informed about the internal discussions, and, unlike at some large corporations, the AT&T directors almost routinely supported the judgment of their chief executive. Nonetheless, until the board passed on the matter, there was no point engaging Baxter in formal talks.

  So for nearly the entire meeting, Trienens talked with Baxter about how a settlement—the Quagmire II deal, he meant—could be filed with the court so as to lift the computer restrictions of the 1956 consent decree. This was a crucial issue for Brown and Trienens if they were going to pursue an inter-intra settlement. The 1956 decree had been filed in federal court, but not in the same district as the 1974 case now being tried before Judge Greene in Washington. The 1956 decree was in New Jersey, under the control of a federal judge named Vincent Biunno. Trienens proposed that instead of actually settling the 1974 case, Justice and AT&T would file the Quagmire II deal as a “modification” to the 1956 consent decree. Simultaneously, Baxter would dismiss the case pending before Judge Greene in Washington. Then, Biunno would be asked to transfer the 1956 case down to Greene for review. These Byzantine legal manuevers would fold the 1956 decree into the current settlement and eliminate the computer prohibitions. Trienens made it clear that this was essential. One of Brown’s first priorities in any deal was to clear AT&T’s path to the information age. There was no reason for him to settle the 1974 case if the 1956 restrictions remained in place. Another potential attraction of the lawyers’ plan was that since the 1974 case would be technically dismissed, not settled, Justice and AT&T might avoid submitting their deal to the close judicial scrutiny provided for by the Tunney Act, which empowered a judge to reject a settlement if it wasn’t in the public interest. Out of political necessity, AT&T and Justice would probably have to accept “Tunney-like” proceedings before Greene, but perhaps they could avoid the sort of contentious inquiry, involving all of AT&T’s competitors, that might sabotage a deal. This was an issue that would have to be explored more fully later. But on the first point, Baxter was agreeable. As long as the settlement effectively prevented cross subsidies by AT&T, Baxter, unlike some AT&T competitors and members of Congress, was happy to let the phone company into the computer business.

  Trienens’ purpose in this discussion, of course, was to lay the groundwork with Baxter for the legal procedures that he hoped to employ in just a few weeks’ time, when the inter-intra split settlement was ready to be filed. Satisfied that Baxter was flexible on the issue, Trienens wound up the discussion. Then, just as Baxter was ready to leave, he casually dropped his bombshell.

  “I know the hundred-pager isn’t your way of doing it,” Trienens said, referring again to Quagmire II. “You’d prefer the two-page, clean, surgical chop.”

  “I sure would,” Baxter replied.

  That was not an offer, Trienens intimated, only a possibility. But Baxter sensed that something was afoot. When they parted, Trienens told the Antitrust chief he would be in touch next week.

  Trienens flew back to New York and met with Brown. He told him that the board of directors could be informed that Baxter would go along with an inter-intra settlement. The entire deal could be finalized in just a few weeks.

  Brown had so carefully prepared his directors—many of whom were “old telephone men” themselves—for the proposal he intended to unveil that the Wednesday board meeting was something of an anticlimax. It commenced at 10:30 A.M., and Brown began by reminding the directors of the tangled history that had brought them to this morning. Formally and informally, the directors had already heard Howard Trienens’ legal analysis a
bout the possibility that Greene would divest Western and that successful appeal might be difficult. They knew, of course, that the Wirth bill had closed off a legislated regulatory solution, which, like Brown, the directors would have preferred. They were ready to hear their chairman’s proposal.

  “We are left with three alternatives,” Brown said, and he listed them.

  First, they could continue to fight—in Congress, in court, and at the FCC. No surrender. Obviously, there would always be a chance that they would somehow be vindicated. But in Congress, they had already taken their best shot, and even with the support of much of the Reagan cabinet, they had failed. In court, Greene was obviously against them. Even if they prevailed on appeal, the price was at least five, perhaps as many as seven years of continued uncertainty, during which time Wirth and other AT&T enemies in Congress would renew their legislative coddling of the phone company’s competitors.

  Second, there was Quagmire II. The previous summer, the S.898 regulatory formula had seemed an attractive alternative to continued litigation against Justice. But once Baxter had escaped the administration’s threat to drop the lawsuit, he had achieved the upper hand in the negotiations. As the document became more and more complex, AT&T had no leverage with Baxter to pare it down. The deal had been born as a tactical compromise in the midst of a political and policy dispute among Reagan’s cabinet; now that the dispute had withered away and Baxter had won, his heart seemed to have gone out of the negotiations, if indeed he had ever been sincere about them. There was a reasonable chance that some kind of injunctive settlement could be worked out in the next year or so. But there was at least an equal chance that Brown and his board would find the terms too debilitating to accept, causing Quagmire II eventually to be scrapped.