The Deal of the Century

by Coll, Steve;

  Finally, there was the inter-intra split. A clean break. An opportunity to regain control of AT&T’s destiny, to compete on equal terms with McGowan, to abandon the rites of “industrial theology” and return triumphant to the competitive, secular world of profit and loss. Yes, to the Bell System’s “family” of one million, many of whom would find no place in the restructured industry, the costs would be tremendous. But for the company’s shareholders, there would be no pain. In the short term, the equity value of the entire Bell System would not be devalued by its breakup. In the long term, the new AT&T would retain its most profitable, cash-rich subsidiaries while divesting the relatively less profitable operating companies. The operating companies would survive because regulators would force local phone users and AT&T’s competitors to pay the subsidies once doled out by 195 Broadway. The cost of local phone service would rise dramatically, but that would be Congress’ political problem, not AT&T’s. The phone company had said all along that higher local rates would be the most obvious price of phone industry competition.

  When Brown concluded his presentation, the board’s first decision was to drop the first alternative—continuing to fight on all fronts—from consideration. A brief discussion ensued about whether it made sense to pursue Quagmire II to its conclusion before offering the inter-intra split to Justice, and about how the split would actually be made. The atmosphere of the meeting was calm and reasoned and unemotional. A clear majority agreed with Brown that there was nothing to be gained by postponing the inter-intra decision. After the Christmas holiday, a new phase of George Saunders’ defense presentation would begin, and Brown was scheduled to testify. The chairman was not looking forward to that event. No doubt there would be media coverage, and the Justice lawyers would pull out the notes from the May 1972 Presidents’ Conference in Key Largo and ask Brown what he had meant by “choking off” competition and “hitting the nails on the head.” Brown considered that Key Largo meeting to be an honest discussion about how to respond to new competition, given AT&T’s “nationwide average” pricing, and he thought that the notes of the meeting, first introduced during the MCI trial in Chicago, were nothing but a cheap ploy designed to feed the media’s appetite for sensationalism in a lawsuit that was too complex for most reporters to explain. Nonetheless, Brown’s very appearance at the trial in Washington would not be good publicity for AT&T, and it would be unpleasant for him personally. If for other reasons the board agreed with Brown that the inter-intra split strategy was the best available, then the chairman was anxious to close the deal as quickly as possible.

  A resolution was presented authorizing Brown to begin negotiations with Justice immediately. A voice vote was called. The resolution passed overwhelmingly. Shortly before 12:30 P.M. and less than two hours after the meeting had begun, the AT&T directors filed out of the board room having decided to destroy their own company.

  Outside the panoramic windows of 195 Broadway, a light snow had fallen on Manhattan. Christmas lights were strung across the city’s avenues, and everywhere was visible the red and green and gold of holiday decorations. The snow had begun melting in the streets, churning under tires into foul brown slush, but on the buildings and trees and parked cars it lay unblemished and bright.

  Whether Charlie Brown returned to his office from the board room to gaze at this sweet and melancholy scene, whether it made him feel misty or indifferent or just relieved, is something he decided he would always keep to himself.

  *Some lawyers on the Justice trial team said later that they suspected during the fall that Baxter was deliberately stalling the Quagmire negotiations so that Greene could deliver his verdict at trial. Baxter denied that, though he admitted that he was never convinced at any time in 1981 that a nondivestiture deal could work.

  Chapter 29

  The Two-Pager

  There was snow on the ground in Washington, too, and Christmas decorations were hanging over Pennsylvania and Constitution Avenues. Between those two broad thoroughfares, the main Justice building was alive with holiday cheer. Around five o’clock, just as the twilight vanished from the western skies across the Potomac, the department’s annual Christmas party had gathered form in the fifth-floor hallway outside the attorney general’s conference room.

  Two floors directly below the party, Bill Baxter, not a sociable man, was still at his desk. His telephone rang, and he picked it up. It was Howard Trienens calling from New York.

  “I’ve talked to Chairman Brown,” Trienens said, “and we’d like to see what a two-page decree would look like.” One trait Trienens shared with Baxter was an exceedingly dry sense of humor.

  Baxter said he thought that could be arranged.

  In a rare moment of introspection, Baxter once remarked, “One of my great faults as a person is that I don’t get too excited.” Trienens’ phone call, however, tickled him so much that he hurriedly climbed two flights of stairs to search for his Antitrust front office deputy, Ron Carr, to tell him the astounding news.

  In the crowded corridor, the bearded Carr was nowhere in sight. Pushing through the reveling lawyers, Baxter bumped into Richard Levine, the Justice attorney principally in charge of the Quagmire II negotiations.

  “Is Ron Carr around?” Baxter asked.

  Levine said that he had seen Carr at the party earlier, but didn’t know where he was now. Baxter, uncharacteristically urgent, moved off to look.

  Curiosity began to gnaw at Levine, a rotund, moon-faced man renowned in the Justice department and among AT&T lawyers for his strange characteristics, which included a stuttering style of speech reminiscent of a sheep’s bleat, and an affection for the arcane details of law and regulation; it was said of Levine that he subscribed to the Federal Register, the inscrutable government publication where new rules and regulations are published, when he was ten years old. The fact that Baxter had appointed Levine to handle the Quagmire II negotiations was one reason some Justice lawyers suspected those settlement talks were really just a filibuster designed to force AT&T’s hand; the growing size and complexity of the Quagmire II document was mainly a result of Levine’s insistent tinkering and revisions. In some ways, though, Levine was much like his boss, Baxter. Both were brilliant theoreticians who seemed instinctively to resist being pragmatic, and both were outsiders to the institutional culture of Justice’s aggressive, workaday trial lawyers.

  In any event, Levine knew Baxter well enough to suspect that it was not Christmas spirit that was the cause of the Antitrust chief’s animated expression, so a few minutes later he wandered down to the third floor to see what was up. Baxter and Carr were in the Antitrust chief’s expansive office, and when Levine stuck his head in the door, they waved him in. There was something conspiratorial about the looks on their faces.

  “What’s going on?” Levine asked.

  “Well,” Baxter replied, “Howard suggested that we go ahead with the two-pager. And what I told Howard is that I want to do it short and clean. Just short and clean.”

  Levine, stunned, said he had some ideas about how to do that, and he ran up the four flights of stairs to his office. He sat down at his typewriter, quickly tapped out a document, and then carried it back down to Baxter and Carr.

  “This is only one page long,” Baxter remarked when the breathless Levine handed him his draft.

  “That’s not the decree, Bill, that’s just the prospectus.”

  Baxter read it over. “OK. Write up the decree.”

  On Thursday and Friday and over the weekend, Levine and Carr worked together to compose the first draft of a document entitled “Modification of Final Judgment.” It turned out to be longer than two pages. The first draft of the decree itself, which provided, not very eloquently, for “the transfer from AT&T and its affiliates to the basic operating companies of sufficient personnel, facilities, and rights to technical information to permit the BOCs independently to engage in procurement for, and engineering, management, and marketing of, retained functions,” took three pages. Two app
endixes, one concerned with definitions and another having to do with “transitional” rules by which the divested operating companies would provide “equal access” to AT&T’s long distance competitors, took another twelve pages.

  The equal-access appendix, Levine and Carr knew, was going to cause problems once AT&T saw the draft. The question of precisely how AT&T would divest two-thirds of its assets, where the lines would be drawn, was of course crucially important to the phone company, since it would dictate the future profitability of the new AT&T as well as the new operating companies. How many new operating companies should there be? What assets and services should they be allowed to keep? The Justice lawyers had decided to let AT&T work all that out for itself and then submit a “plan of reorganization” to the court for approval. But the question of how the new companies would treat MCI and other long-distance competitors was something they could not leave to AT&T. So the two lawyers drafted a series of detailed rules designed to enforce pure equality between all long-distance companies. Among other things, the operating companies would have to convert the phone system to allow MCI customers to dial the same number of digits that AT&T customers did. But the appendix did not specify how much “rent” MCI would have to pay for this improved service, or whether that rent would be the same as AT&T’s. All the draft said was that “the charges for each type of exchange access shall be cost justified on the basis of differences in services provided.” In other words, the important matter of access fees would have to be negotiated after the phone company was dismantled. In truth, there was no other feasible way to do it “short and clean.”

  The collaboration of Levine and Carr was not without its difficulties. Levine would draft a paragraph, and Carr would rewrite it, and then they would argue, Levine insisting that Carr “would never understand the issues” as well as he did, and Carr trying to transform Levine’s writing “into something near English.” By Monday, however, they had a roughly typed document ready to be sent to Trienens in New York.

  The circle of secrecy surrounding the “December 21st draft,” as it was called, was extremely tight. Trienens had been vehement on this point when he called Baxter, and he used every available opportunity to remind the government lawyers that if its confidentiality was violated, the deal would be off. At Justice, only Baxter, Levine, and Carr were aware of the negotiations. And since the two AT&T lawyers in Washington who were in charge of Quagmire II, Jim Kilpatric and Bob McLean, were not yet aware of the decision made at 195 Broadway, Levine had to carry on with the injunctive settlement talks as if nothing had happened.

  In New York, knowledge about the board of directors’ decision the previous Wednesday had been closely controlled. There were less than ten executives on the twenty-sixth floor who knew what had happened. The plan was that once Trienens received the Justice draft, he would take Christmas week—while most AT&T executives were away from the office—to review and revise it. Then the December 21 draft would be returned to Baxter. If Justice accepted the changes, or if it appeared that the outstanding differences could be easily resolved, then more executives would be brought into the discussions to prepare for the devastating announcement.

  Prior to the Wednesday board meeting, for example, Ed Block had drafted what he later described as the “rhetoric” by which the inter-intra split could be sold to AT&T’s employees, shareholders, and the public.

  At home, feeling shocked, dismayed, and abandoned, Block had typed, “It is your right to know how we reached this decision. And why. And what the effects of it will be. We did not come to this decision easily. What we and all the other parties sought was to balance the interests of tens of millions of consumers, three million shareowners, one million employees, and the national defense. The issues have been debated for over a decade in the executive, legislative, and judicial branches of government; in the industry; in the marketplace; in the company; and in the press. There has been no referendum, but the verdict is plain enough. We agreed to the consent order because we believe it expresses the consensus that, in the main, has been reached on the framework for a new national telecommunications policy.”

  The core idea, which Block had discussed with Brown, was to try to persuade the public that the inter-intra split, while it was on the one hand a “deal” between Justice and AT&T, also represented a “consensus,” perhaps by default, about how the country wanted its phone system to be run. That way the burden of justifying this radical act would be shifted away from the phone company, while at the same time AT&T would appear accommodating. To be sure this strategy would work, Block had secretly hired Lou Harris, who was told nothing of the impending settlement, to conduct a poll about how consumers and shareholders would react to the announcement of an inter-intra split. The Harris interviewers were able to ask hypothetical questions about breaking up the Bell System by using an interview with Bill Baxter recently published by a telephone industry newspaper. There was enough information in that interview about how the breakup of AT&T might actually be accomplished for the Harris surveyors to construct a hypothetical questionnaire. The results of that poll had convinced Block that the breakup could be explained and would be accepted by the public, and he had communicated this belief to Brown before the Wednesday board meeting. When Trienens received the December 21 draft from Baxter, Block was instructed to await a “go” signal from Brown before beginning to prepare the full array of public relations materials that would be needed for an announcement; that preparation required that a number of public relations and media relations executives be informed of the settlement decision. Brown was not going to risk widening the circle of knowledge about the deal until after Trienens had revised and approved Baxter’s draft. And that, said Brown, a deeply religious Christian, could wait until after Christmas.

  And with no further ado, the AT&T chairman flew off to Florida with his wife for the holiday. That Brown could vacation in the sunny citrus state while the very terms of his company’s dismantlement were being drawn up struck Block as compelling evidence that his boss was a “pretty cool customer.”

  Indeed, none of the principals in the negotiations allowed the impending breakup of the world’s largest corporation to interfere with his Christmas vacation plans. On Monday, as soon as the December 21 draft arrived by special courier from Washington, Howard Trienens flew home to Chicago. On Thursday, the 24th, Ron Carr was flying to California to spend the holiday with his wife and her parents. Baxter planned to stay in Washington for Christmas, but he confirmed the reservations he and his live-in companion had made to fly to Utah on New Year’s Eve for a week of skiing.

  Monday evening in Chicago, Trienens came from the airport to the headquarters office of Sidley & Austin to attend his firm’s annual Christmas party. George Saunders, too, had flown back from Washington for the festivities. When Trienens saw Saunders, he cornered him and said, “I’ve got something I want you to look at.”

  The two lawyers stepped into an empty office. Trienens took out the typed draft from Washington and handed it to Saunders. The trial lawyer, who had spent the last eight years of his life fighting against the very eventuality that was now laid before him, was astonished. He couldn’t believe it; he had never thought the Bell System would do something like this.

  Trienens went on to brief his partner about the deliberations at 195 Broadway and explained that he had taken the draft to Chicago to work on it over Christmas.

  “We’ve been saying all along that it was crazy,” Saunders remarked. “It doesn’t look any better on paper.” He shook his head. For once, Saunders had nothing to say.

  On Sunday, two days after Christmas, Trienens finally called Baxter at his home in Washington to say that in principle, he and Charlie Brown found the December 21 draft acceptable. He had one suggestion: Justice should allow AT&T to create a “central services organization” for the new operating companies, in which some of Bell’s vast managerial and technical resources could be pooled after the breakup. Baxter said he had no problem with th
at idea. Trienens also had some clarifying questions about the ownership of all the “embedded” phone equipment in the country, which was owned by AT&T and leased to residential and business customers. The value of this embedded base of equipment was somewhere between $9 and $14 billion and Trienens wanted to be sure that Baxter agreed AT&T would retain ownership of all of it after the breakup. That, too, was fine with Baxter—the operating companies would be prohibited from entering the phone equipment business after divestiture, and Western could then sell or continue to lease the phones already present in American homes and offices. The franchise of the divested operating companies would be to provide local phone service only, Baxter said; everything else belonged to AT&T. When Trienens hung up, the only substantive aspect of the deal that remained to be negotiated was the consent decree’s “equal access” appendix. The two lawyers arranged to meet in Baxter’s office on Wednesday to discuss again the broad principles of the settlement. Charlie Brown would fly up from Florida, Trienens added, to participate.

  Baxter then called Ron Carr at his in-laws’ house in California. “They want to do it. Come back as soon as possible,” he instructed. Carr agreed to cut short his vacation and catch a plane to Washington the next morning.

  There were several reasons why George Saunders was in a disagreeable mood when he answered the ringing telephone beside his Madison Hotel bed at seven o’clock on the cold and sunny morning of Wednesday, December 30.

  For one thing, Saunders was rarely his effusive and articulate self so early in the day. He typically stayed awake until two or three in the morning, keeping company with his trial team staff and perhaps a pitcher of room service martinis. But in the morning, it was often a struggle to reignite the engines that drove his enthusiastic personality. For another, Saunders had hoped by now to be golfing in Florida on a short winter vacation. The trial was in recess until January 15, and even Judge Greene had fled town for a Caribbean holiday. But Saunders had been forced to return to Washington to manage the details of his recently escalated battle with Greene over how many more witnesses AT&T would be allowed to call in its defense. About two weeks earlier, just as the last of the celebrity witnesses had finished testifying, Saunders had submitted to Greene a list of yet another 100 witnesses that he had intended to call. The judge had erupted in a fit of temper previously unmatched in his, or perhaps any, courtroom. A few days later, he had ordered Saunders to prepare a detailed brief justifying why each of the witnesses on his list was necessary to the AT&T defense. Saunders had known that his witness list would provoke Greene to anger, but he had decided to prolong his defense until either Greene changed his mind about the case or he told Saunders to shut up and sit down. So Saunders had canceled his golf and returned to town to write his justifications, like a schoolboy on detention. Finally, there was the lingering memory of the document Trienens had shown him in Chicago. Saunders still did not believe that AT&T was serious about the deal, but the very idea had shadowed his mood over the last week.