The Deal of the Century

by Coll, Steve;

  Saunders answered the phone gruffly. It was Howard Trienens, who had spent the night in AT&T’s eleventh-floor suite. “Come up here, George. I want you to look at something.”

  After pulling himself out of bed, Saunders dressed, staggered out of his suite, and rode the hotel elevator one floor up.

  When he entered Trienens’ suite, his partner handed him a copy of the working draft of the inter-intra settlement decree. Saunders still didn’t understand why AT&T would do something like this, but instead of saying anything to Trienens, he ordered some coffee and read the document.

  With some caffeine in his system, Saunders was about to announce to Trienens that the Bell System would never allow this to happen when his words were stifled by the sound of a key turning in Trienens’ door. The door pushed open and Charlie Brown stepped inside, carrying the bags he had taken on the flight from Florida that morning.

  “Have you got it?” Brown asked Trienens.

  “Here it is,” Trienens said, handing the chairman a copy of the draft that Saunders was holding. As Trienens and Brown talked, it finally dawned on Saunders that in just a matter of days, U.S. v. AT&T would be over, and the Bell System would be no more.

  “Charlie, if you do this, what are you going to say about all the sworn testimony we entered that says this is crazy?” Saunders inquired.

  “Well, I know we put in some testimony criticizing the government’s remedy, but I think we can handle that.”

  “But Charlie, the other day we had a guy on the stand from the Italian phone company. He testified about the government’s remedy. And he spoke in Italian, so I couldn’t understand everything he was saying, but he kept saying over and over, ‘Pazzo! Pazzo! (Crazy! Crazy!)’”

  Brown only laughed. But in the days ahead, in meetings with Justice department lawyers or Reagan administration officials, Brown and Saunders would occasionally catch each other’s eye, and one of them would say, savoring the irony, “Pazzo! Pazzo!”

  Chapter 30

  Après Ski

  “I can’t understand how you are letting something like this hang up the whole thing,” Charlie Brown was saying. “You’re jeopardizing the whole deal.”

  “Well, so be it,” Bill Baxter replied.

  Brown hung up the phone; the deal was off, he thought. It was Friday, New Year’s Day. Brown was back in Florida. Baxter was in a Park City, Utah, ski chalet, negotiating the inter-intra split between runs down the Rocky Mountain slopes. Two days earlier, at the meeting in the Antitrust chief’s Washington office, Brown and Baxter had reviewed together the main sections of the proposed decree: the reorganization of the Bell System, the responsibilities of the newly divested operating companies, and the rules governing equal access to the local exchanges by AT&T, MCI, and other long distance companies.

  “All right,” Brown had said when the review was complete. “We agree in principle to these terms. Now let’s go through and flyspeck it.”

  Brown had departed and later that afternoon Howard Trienens had arrived at Justice to work on the details with Ron Carr and Richard Levine. Quickly a snag had arisen in the negotiations. In Appendix B, the section of the decree that described the new rules governing equal access between AT&T and MCI, Baxter had insisted that the new operating companies be required to construct their switching stations in a way that ensured that AT&T would not obtain a technical and pricing advantage over MCI by virtue of the phone company’s preexisting, ubiquitous long-distance network, which contained many more switches than did MCI’s. It was a relatively minor technical issue, but the provision outraged Trienens and Brown because Baxter was actually trying to dictate the detailed engineering of AT&T’s physical plant—something the Bell executives thought no government official had a right to do. Brown could understand Baxter’s concern, but he thought the Antitrust chief’s approach to the problem was plainly “ridiculous.” But when Baxter would not give in to Trienens at the Wednesday negotiating session, Brown had decided that he would personally call the Antitrust chief in Utah on New Year’s Day. That, too, had failed, and now the entire deal was in jeopardy.

  Ed Block didn’t know that. At 195 Broadway on New Year’s Day, he had begun feverish preparations to shape and control how the breakup of AT&T would be perceived by news media, shareowners, employees, and Wall Street. After the Wednesday meeting with Baxter, Brown had given him the “go” signal. On Thursday morning, Block told several of his key underlings about the impending settlement. One of them, Bill Mullane, an assistant vice-president for media relations, reacted first with shock and dismay, and then said, “It’ll be a helluva news story.” Now Mullane, Block, and several other assistant vice-presidents were in Block’s office mapping a strategy. The television set was tuned to the college bowl games, but the sound was off.

  There were nine separate elements of the massive information control plan that Block had in mind. They would have to finalize the ad copy previously drafted by Block. Not only would that copy become a national newspaper advertisement addressed to shareholders and employees, it would also be the basis for Charlie Brown’s statement at the unveiling press conference. They would have to prepare elaborate “briefing materials” for the press, statements from Bell executives and other documents selling the idea that divesting two-thirds of the phone company’s assets was a sound and rational idea. Similar press material would have to be prepared for all of the local operating companies, whose executives would not be informed of their fate until the last possible moment. The operating company presidents, soon to be on their own, would need a private briefing package delivered to them on the morning of the announcement. Less sophisticated material would have to be prepared for the rest of AT&T’s one million employees so that the first information they received about the breakup came from the company, not outsiders. Perhaps most important, a series of “shareowner and key constituency” letters had to be written—hundreds of letters addressed to the company’s regulators, creditors, and equity holders—which were designed to “get to them immediately with our side of the story,” as Block put it. Then there was the physical advertising mock-up and media schedule that had to be prepared. Block decided to bring into his confidence some executives at AT&T’s Madison Avenue advertising agency, N. W. Ayer. Ayer secretly sent the ad copy to a trusted typesetter in Philadelphia, who had his employees set and proofread the ads in different pieces, so none of them understood what the announcement was about. Finally, “talk-from” outlines and other general background materials would have to be prepared for AT&T account executives, who would have to explain the breakup to the company’s large business customers.

  In each of these separate publicity campaigns, Block wrote in an early planning document, the overall objective was “to assure, to the extent that we can, that our business emerges from the public clamor that is almost certain to attend such an event undiminished as an investment prospect; undiminished as a place to work …; and undiminished in its reputation as a well-managed business.” At the same time, Block conceded, “It has to be acknowledged that the price is high and that it will be the subject of considerable criticism and debate. Our information materials must affirm the prudence of the management judgment that the advantages of the new decree warrant its costs and its risks.… Our objective should be to gain broad public acceptance of the change as being in the best interests of the nation as a whole. In achieving an effective balance of interests, the proposed decree maintains local service capabilities; retains ability to plan and operate unified nationwide intercity network; assures that critical national defense responsibilities can be met; provides for growing competition in every aspect of telecommunications, in line with emerging public policy directions; is positive in terms of preserving and enhancing U.S. industry leadership in world markets.”

  In the weeks ahead, Block’s “thematic” objectives would become like a repetitive hit song crooned by Bell executives and, eventually, by Wall Street analysts and the news media. Block was aware that his sales
campaign was more than a little disingenuous—the breakup of AT&T was a cataclysmic event for the phone company and the nation, he believed—but like Chairman Brown, Block thought that the worst thing that could happen would be if Congress decided to interfere with this historic decision after it was made. If AT&T could not break itself up on its own terms, if it failed to tell the story “one way, our way,” then the inter-intra split might turn out to be one of the greatest business fiascos in American history. The prospect of Congressman Tim Wirth attempting to “fix” the breakup was almost too chilling for AT&T’s top executives to contemplate. A week was not much time to prevent such a catastrophe, but Block and his public-relations cohorts began that Friday to attempt the feat.

  And over the weekend, by the miracle of modern telephony, the deal that had been dead on Friday was slowly being brought back to life. The negotations conducted that Saturday and Sunday were like an advertisement for the importance of quality, universal phone service. Trienens had returned to his home in Chicago, Richard Levine and Ron Carr remained in Washington, Brown was still in Florida, and most of Baxter’s days were spent skiing in Utah. Trienens discussed the sticky paragraph by phone with Levine and Carr. When they reached an agreement on some point, Trienens would call Brown while the Antitrust front office lawyers would try to reach Baxter. Sometimes Baxter returned their calls from a pay phone in a warming hut halfway down the Park City ski slopes. By the end of the day on Saturday, Baxter had backed down from his insistence on engineering the operating companies’ physical plant, and by Sunday a compromise pricing formula had been devised to address his equal-access concerns. That day, when it was clear that the settlement deal was on again, Trienens and Brown discussed setting a date for an announcement and the commencement of Block’s publicity campaign. They wanted to make the announcement on a Friday—a weekend would help to moderate the first wave of public reaction.

  In one of his telephone conversations with Levine on Sunday afternoon, Trienens asked, “Richard, could you do us a favor?”

  “Sure.”

  “We have a situation here where we’ve got to tell a lot of people about this decision—the operating company presidents and other people—but once we get that done, we really can’t hold it. We’ve got to get it out. So we’re structuring some things that we’d really like to do. What I’m asking is whether we could announce the settlement on the morning of January 8, Friday.”

  “I’m sure we could do that, Howard,” Levine replied without hesitating.

  In fact, Levine was ecstatic. Trienens’ proposal coincided perfectly with a secret plan now in the final stages of preparation in the Antitrust front office, a plan that had nothing to do with the AT&T case. Before he flew off to Utah, Baxter had made the final decision to dismiss the pending Justice antitrust suit against computer giant IBM. Baxter had been reviewing the long-entangled IBM case ever since he had come to Justice the previous April, and he had found little in the case to recommend it. Not only was the 1968 suit an “embarrassment” because it was so bogged down procedurally, it was precisely the sort of antitrust case that offended Baxter’s conservative ideology. The case adhered not to the “bottleneck” theory of U.S. v. AT&T but rather to allegations deriving from IBM’s market share in the computer industry. One firm tenet of Baxter’s theoretical views about antitrust law was that neither huge size nor large market share was by itself a violation of the antitrust laws. The only thing that really mattered to Baxter was economic efficiency. If IBM had become a huge corporation because it was more efficient than its competitors, then it deserved its riches. During the summer, Baxter had held a series of secret private “hearings” in his office, in which Justice lawyers had debated the issues in the IBM case against the computer corporation’s own trial counsel. Baxter had asked the Justice attorneys to justify why they should be allowed to continue prosecuting the case, and, similarly, he had challenged the IBM lawyers to argue why it should be dismissed. Now he had made his decision, and as soon as the attorney general approved it, he wanted to make an announcement. The trouble was that on Saturday, January 9, Baxter was flying off to Europe for an international antitrust conference. Since he would be skiing until Thursday, the only “window of opportunity,” as Levine put it, was Friday, the same day AT&T wanted to announce the inter-intra deal.

  On Monday, Levine and Carr worked quickly, in consultation with Trienens and one or two other AT&T executives, to finalize the language of the AT&T consent decree. They also polished up the “fact memo” that would recommend the IBM dismissal to Attorney General William French Smith. Both documents would have to be reviewed personally by Baxter as soon as possible. Carr and Levine decided to recruit a front office attorney named Loren Hershey to fly to Utah with the documents. They told him about the AT&T settlement, but not about the decision to dismiss the IBM case. On Monday night in the main Justice building, they presented Hershey with two sealed manila envelopes and instructed him to fly to Park City the next morning.

  At dawn Tuesday, Hershey drove from his home in suburban Virginia to Washington National Airport to catch a 7:00 A.M. Western Airlines flight to Salt Lake City, via Chicago and Minneapolis. Fortunately, he locked the two sealed envelopes inside his briefcase and carried them on the plane; somewhere between Washington and Salt Lake City, Western lost Hershey’s checked baggage.

  It was snowing when Hershey’s plane touched down at the Salt Lake City airport. Inside the terminal, he called back to Ron Carr at the Justice offices in Washington.

  “Get those papers to Bill and tell him that Charlie and the boys are standing by in New Jersey,” said Carr, who was by now well amused by the cloak-and-dagger secrecy surrounding the AT&T deal. Carr’s humor, like Baxter’s, was so dry as to be often indecipherable, and Hershey wasn’t sure what Carr was talking about. So he hung up and dialed the Antitrust chief’s Park City resort condo to pass on the message.

  The son of Baxter’s statistician girlfriend answered the phone. “Is Bill Baxter there?” Hershey asked.

  “He is out skiing. He said I should expect your call. He said to come on up here and leave the papers.”

  “If he calls or comes back, tell him I’ll be up there in an hour.”

  Hershey rented a car and began the forty-five-minute drive to Park City. The snow had let up and the well-traveled roads were clear. Around 1:00 P.M., he arrived in the snow-covered, pine-forested resort town and followed the directions he had been provided to Baxter’s condominium.

  But Baxter was still out skiing. He had called down while Hershey was en route, and he had repeated his request for Hershey to just leave the papers and return for them later. But Hershey was determined to turn the envelopes over to Baxter personally. And since the Antitrust chief had left further instructions that Hershey was to be offered something to eat if he was hungry, the Justice lawyer devoured a ham sandwich and waited.

  A little after two, Baxter called again. “I’m up here on the mountain,” he told Hershey. “I’ll be down in an hour.”

  “I have the papers and a message from Ron. He said to tell you that Charlie and the boys are standing by in New Jersey.”

  Baxter was characteristically distant. “Fine. Fine. I’ll be down.”

  Still, though, the Antitrust chief did not return. Hershey decided to go for a walk; in his cashmere overcoat and business suit, he felt ridiculous traipsing through the resort town. When he returned to the condo, Baxter still wasn’t back.

  Finally, just as the sun was setting behind the Rocky Mountains, Baxter appeared carrying his skis and brushing the snow from his clothing. His ordinarily pale complexion had been reddened by the wind and cold.

  “How was the skiing?” Hershey inquired.

  “It was mystical,” the Antitrust chief replied, seemingly serious.

  Hershey handed him the papers. “Why do you think they did it?”

  “Well, I think they had to consider their options. And I think they considered their self-interest as well as ours.”
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br />   And with that inscrutable summation to mull over, Hershey soon found himself winging back to Washington with the documents, now signed and approved by Baxter.

  Meanwhile, “Charlie in New Jersey” had been informed that a Friday announcement was now definite. A final draft of the consent decree had been approved by both sides. The “boys” also referred to by Carr were the presidents of AT&T’s twenty-two local operating companies from around the country, who had been instructed to assemble at the parent company’s campus-style office complex in upscale Basking Ridge, New Jersey, for an 8:00 A.M. Tuesday meeting. The presidents were not told what was on the agenda, but it was not unusual for a Presidents’ Conference to be called on short notice or without explanation. The New Jersey site, where 4,500 employees of AT&T’s “general departments” worked, was chosen because its conference room facilities were considerably larger than those at 195 Broadway. That morning, the two dozen presidents gathered in a tiered, theater-style room in Basking Ridge’s executive office building. Before each row of chairs was a single, seamless desk, or, in the vernacular of modern corporations, “work space.” Before the audience of quizzical executives stood Charlie Brown, Howard Trienens, and Ed Block.