The Deal of the Century

by Coll, Steve;

  The Justice trial lawyers, unable to afford retreats to paradisiacal health farms and without any new litigation to absorb their energies immediately, languished for months after the settlement in what many of them described as a “void.” Some stayed with the government for several years to work on the Tunney Act proceedings and other cases, but most of the prominent members of the Antitrust front office and the original trial team—Jim Denvir, Peter Kenney, Ron Carr, Jeff Blumenfeld—eventually followed Gerry Connell into private practice in Washington.

  Bill Baxter’s tenure as Antitrust chief became even more controversial after the AT&T settlement. After the Wall Street Journal revealed that Baxter had done consulting work for IBM while he was a law professor at Stanford and that he owned stock in computer companies affected by his decision to dismiss the government case against IBM, the Justice department’s Office of Professional Responsibility launched an investigation into the possible conflict of interest. Baxter was eventually exonerated. However, no sooner had his name been cleared than new controversies arose. Newspapers reported that morale had “plummeted” in the Antitrust division during Baxter’s reign, and that the Antitrust chief was perceived by government lawyers as “aloof and contemptuous” of the division’s employees. After dramatically loosening the Justice department’s “merger guidelines,” Baxter set off an unprecedented wave of corporate mergers and hostile takeover attempts, prompting a fresh round of criticism from Congress.

  Still, on December 8, 1983, when Baxter resigned his position as assistant attorney general for Antitrust and returned to teach law at Stanford University, he left behind a profound legacy in the Antitrust division—a legacy that must have pleased him.

  After he retired as chairman of AT&T, John deButts, the man who embodied for so many Washington lawyers and politicians the unchecked power and stark arrogance of the unified Bell System, built a mansion for himself and his wife, Trudie, on eighty sprawling acres in the somber Virginia hunt country, fifty miles west of the nation’s capital.

  Though he was an immensely wealthy man, he found the pace of retirement in the countryside difficult to accommodate after so many years of living in Manhattan and traveling the globe as the distinguished leader of the largest corporation in the world. After moving into his new estate, a circulation problem led to the amputation of one of his legs. So it was that after the settlement of U.S. v. AT&T, deButts spent much of his time sitting in a wheelchair in the glass-enclosed porch behind his house. There he commanded a melancholy view of unbroken pasture, maples, and oaks stretching west to the Blue Ridge Mountains.

  DeButts never publicly criticized the decision taken by his successor to dismantle the Bell System, although there were many in the company who remained convinced that deButts himself would never have given in to the government, no matter what the cost. In December 1981, in the midst of the inter-intra negotiations, Brown called deButts in Virginia to tell him about the deal that was under way. At the end of their conversation, deButts said, “You have no choice.”

  But the destruction of AT&T shook deButts deeply. One autumn afternoon in 1984, sitting with a visitor in his glass-enclosed porch, chain-smoking Merit cigarettes, deButts spoke eloquently about the impact of the breakup on the last years of his life. During the monologue, he paused occasionally to fight back tears.

  “I hear about it every single day from my friends,” he said. “Friends from business, neighbors, even my family. I have a cousin around here who couldn’t get phone service installed in his barn. Nobody could make up his mind about who was going to do what. He wanted service in several barns, with all the wires underground. He just wasn’t getting to first base. So I finally called somebody at AT&T headquarters in New York and said, ‘Why don’t you get somebody down here who can take care of these problems?’ And they did. But my cousin got a bill for over $5,000. We never used to charge anybody that much for installation. It’s unheard of. I even made them go back and check it to make sure it was right. It was.

  “It pains me. It hurts me a lot. I’ve been used to saying, ‘OK, Mr. Customer, if that’s what you want, then that’s what you’re going to get.’ What bothers me the most is that I see a deterioration of the service concept in the operating companies themselves. Profits are beginning to come first.

  “I used to get questions when I first became chairman. ‘Which do you want, profits or service?’ And I said, ‘I want both. But service comes first. Profits will come right along with it.’ And they finally stopped asking me that because they knew I meant it. People won’t think about what it costs if the service is good, as long as the cost is within reason.

  “It’s a tragedy, I think. During the 1976 fight with Congress, I was disappointed that I didn’t get a better reaction from stockholders and customers. They never thought we were in trouble. As a guy at the FCC told me once, ‘John, don’t worry about it. No matter what we do to you, you always come out all right.’

  “And we did. But we couldn’t survive this.”

  Notes and Sources

  The preceding narrative is the product of approximately 100 interviews and a review of tens of thousands of pages of documentary evidence—including trial transcripts, settlement conference transcripts, court pleadings, depositions, exhibits, congressional hearings, internal Justice department documents produced under a Freedom of Information Act request, corporate filings with the Securities and Exchange Commission, calendar and diary entries, expense reports, letters, and handwritten notes. Nothing in the book has been invented or disguised by the author. References to weather conditions are derived from the federal government publication Climatological Data. Descriptions of meeting rooms, hotel rooms, and other locations are based in most cases on personal visits by the author, but also on brochures, books, maps, and the recollections of persons interviewed.

  Much of the dialogue in the book is taken from transcripted proceedings in open court or from closed chambers conferences where a court reporter was present. In rare instances, a word or two has been changed for grammatical reasons or to clarify meaning. In a few cases, conversations were condensed without the constant use of ellipses. Such condensation is usually referred to in the narrative. In any event, the author took extreme care to be sure that these few changes did not alter the context of the dialogue or its meaning.

  Other dialogue is based on the recollections of persons interviewed. In most cases, the substance of these conversations was confirmed by two or more sources, though occasionally dialogue is based on the recollection of only one source. The reader should not assume that the direct source of any recollected conversation is one of its participants; in some cases dialogue was repeated to third parties and then confirmed by the author, while in other cases conversations are based on handwritten notes later made public or available to the author against the wishes of the participants.

  INTERVIEWS

  Approximately half of the persons interviewed for this book requested anonymity. Most often, their reasons reflected concern about damaging existing professional relationships. Despite such legitimate fears, many of these sources gave generously of their time in an attempt to make the book fair and accurate.

  Other sources, equally generous with their time, allowed their names to appear on a list of persons interviewed by the author. Among them: Ken Anderson, Bill Barrett, Bill Baxter, Lewis Bernstein, Ed Block, Charles Brown, Ron Carr, Tom Casey, Keith Clearwaters, Gerry Connell, Ken Cox, John deButts, Bob Eckhardt, Richard Favretto, Charles Ferris, Joseph Fogarty, Jules Fried, Henry Geller, David Gergen, James Graf, Harold Greene, Vance Hartke, Walter Hinchman, Gregory Hovendon, Charles Hugel, Jules Joskow, Thomas Kauper, Richard Levine, William Lindholm, Sanford Litvack, Thomas Mauro, Archie McGill, Nick Miller, Hugh Morrison, Bernie Nash, Stuart Newberger, Alexander Pires, Martha Roadstrum, Kenneth Robinson, Romano Romani, Teno Roncalio, Jonathan Rose, William Saxbe, Lee Selwyn, Harry Shooshan, Bernie Strassburg, Morris Tannenbaum, Howard Trienens, Lionel Van Deerlin, Philip Verveer, Bernie
Wunder, and John Zeglis.

  DOCUMENTS AND SECONDARY SOURCES

  The author employed voluminous primary and secondary documents in the course of his research. The following list is not intended as a comprehensive bibliography. Rather, it is a citation of certain key documents, many of them publicly available, that interested readers may examine to explore the events chronicled in the book.

  Chapter 1: U.S. v. AT&T, civil no. 74–1698. Plaintiffs’ Third Statement of Contentions and Proof, 451 ff.; 679–696. Defendants’ Third Statement of Contentions and Proof, 612–625. Testimony of John deButts, trial transcript, 13, 986–14,135. Testimony of William McGowan, trial transcript, 4,023 ff.

  Chapter 2: U.S. v. AT&T, testimony of William McGowan, trial transcript, 3,638–4,057. Testimony of Larry Harris, 4,165 ff. January 9, 1973, handwritten notes of Kenneth Cox. March 2, 1973, notes of George Cook and William McGowan. Plaintiffs’ Third Statement of Contentions and Proof, 543–560. Defendants’ Third Statement of Contentions and Proof, 645 ff.

  Chapter 3: Justice department log of contacts during Civil Investigative Demand investigation of AT&T. United States Judiciary Committee, Subcommittee on Antitrust, hearings July 1973; hearings July 9, 30, and 31, 1974. U.S. v. AT&T, Testimony of William McGowan, trial transcript, 3,684 ff.

  Chapter 4: U.S. v. AT&T, testimony of Walter Hinchman, trial transcript, 10,692 ff. Testimony of William McGowan, 3,684–4,023. Confidential MCI financial statement dated December 1973. Memorandum by Larry Harris dated October 2, 1973. Letter to Bernie Strassburg dated October 1, 1973. Memo from Walter Hinchman to Federal Communications Commission dated December 4, 1973. Plaintiffs’ Third Statement of Contentions and Proof, 388 ff.; 560–621. Defendants’ Third Statement of Contentions and Proof, 645–700. Testimony of John deButts, trial transcript, 13,995 ff. Testimony of Bernie Strassburg, 23,357–23,398. Electronic News, November 12, 1973.

  Chapters 5–7: Justice department log of contacts during Civil Investigative Demand investigation of AT&T. Original U.S. v. AT&T complaint filed November 20, 1974. Transcript of proceedings before Judge Joseph Waddy, February 20, 1975. Washington Post, November 21, 1974. Business Week, November 30, 1974. Electronic News, December 25, 1974.

  Chapter 8: U.S. v. AT&T, testimony of Walter Hinchman, trial transcript, 10,302 ff. Direct and cross examination of Bert C. Roberts, April 27, 1981. Testimony of William McGowan, trial transcript, 3,895 ff. Internal MCI business plan and Execunet proposal dated June 3, 1974. MCI stock prospectus dated November 1975. Defendants’ Third Statement of Contentions and Proof, 692–700.

  Chapter 9: “Agenda for Oversight,” staff report of the House Communications Subcommittee, April 1976. Hearings on CCRA, House Communications Subcommittee, September 27–30, 1976. Business Week, March 15, 1976. Electronic News, April 12, 1976; April 26, 1976; May 10, 1976; May 31, 1976. Wall Street Journal, November 4, 1983.

  Chapters 10–12: U.S. v. AT&T, transcripts of status hearings before Judge Harold Greene, August 21, 1978; January 12, 1979; November 7, 1979; September 17, 1980.

  Chapters 13–16: Transcripts of settlement conferences in the chambers of Judge Harold Greene, January 5 and January 14, 1981. Order of Judge Greene dated January 7, 1981. U.S. v. AT&T, trial transcript, 3–246. Transcript of settlement conference, January 15, 1981. Letter from Howard Trienens to Judge Greene, January 29, 1981. Letter from Charles Renfrew to Judge Greene, January 29, 1981. Letter from Howard Trienens to Judge Greene, February 23, 1981. Letter from Sanford Litvack to Judge Greene, February 23, 1981.

  Chapters 17–18: Senate Armed Services Committee hearing on S.694, March 23, 1981, testimony of Caspar Weinberger. U.S. v. AT&T, Defendants’ Memorandum Concerning Defendants’ Exhibit D–1–141. Letter from Frank Carlucci to William Baxter, April 8, 1981. U.S. v. AT&T, Defendants’ Chronology of Events Concerning Exhibit D–l–141. “Department of Defense Analysis of the Effects of AT&T Divestiture Upon National Defense & Security and Emergency Preparedness,” June 30, 1981. Letter from William Taft to William Baxter, July 2, 1981. Transcript of Press Conference of William Baxter, Department of Justice Office of Public Affairs, April 9, 1981. “Confirmation Hearing of William F. Baxter,” Senate Judiciary Committee, March 19, 1981.

  Chapter 19: U.S. v. AT&T, Testimony of William McGowan, April 9, 1981; April 10, 1981; April; 13, 1981; May 1, 1981.

  Chapters 20–21: “Telecommunications Competition and Deregulation Act of 1981,” Senate Commerce Committee hearings, June 2, 1981; June 11, 1981; June 15, 1981; June 16, 1981; June 19, 1981. “DOJ Oversight: U.S. v. AT&T,” Senate Judiciary Committee hearing August 6, 1981. See testimony of Malcolm Baldrige, Sherman Unger, Bernard Wunder, William Baxter, William Taft.

  Chapter 22: U.S. v. AT&T, trial transcript, 6,803–6,814; 11,233–11,242; 11,380–11,411. Telecommunications, July 20, 1981.

  Chapter 23: Transcript of chambers conference before Judge Greene, July 29, 1981. Order of Judge Greene, July 29, 1981. Department of Justice, Office of Public Affairs, “Press Guidance,” July 29, 1981.

  Chapter 24: U.S. v. AT&T, trial transcript, 12,974–13,149; 13,796–13,834; 14, 687–14,700.

  Chapter 25: U.S. v. AT&T, trial transcript, 14,844–14,1910. Opinion of Judge Greene, September 11, 1981.

  Chapter 26: All interviews.

  Chapter 27: U.S. v. AT&T, trial transcript, 15,889–15,911; 16,101–16,152; 16,645–16,651; 16,994–17,008; 17,458–17,544; 19,529–19,637; 19,958–19,970; 23,320–24,711.

  Chapters 28–30: “A Public Relations Case History of the Biggest Business Story of the Decade,” keynote address by Edward Block to the PRSA Regional Conference, Chicago, June 9, 1983. “Telecommunications in Transition: The Status of Competition in the Telecommunications Industry. A Report by the Majority Staff of the Subcommittee on Telecommunications … House of Representatives,” November 3, 1981. Also see Wall Street Journal’s excellent article of January 19, 1982.

  Chapter 31: Unedited network videotape of January 8, 1982, press conference. Transcripts of CBS and ABC evening news, January 8, 1982.

  Chapter 32: Transcript of hearing before Judge Biunno, Newark, New Jersey, January 11, 1982. Transcript of hearing before Judge Greene, January 12, 1982.

  Chapter 33: “DOJ Oversight: U.S. v. AT&T,” Senate Judiciary Committee hearing January 25, 1982. “Proposed Antitrust Settlement of AT&T,” joint hearings of House Telecommunications Subcommittee and House Subcommittee on Monopolies and Commercial Law, January 26 and January 28, 1982. “DOJ Oversight: U.S. v. AT&T (The Effect on Local Rates),” Senate Judiciary Committee hearing, March 25, 1982.

  Chapters 34–35: “Losing by Losing: Market Response to Judicial Policymaking in the First Year of the AT&T Divestiture,” draft paper by Paul W. MacAvoy and Kenneth Robinson, 1985. “The Judge Who’s Reshaping the Phone Business,” Fortune, April 1, 1985. Business Week, December 3, 1984. AT&T Annual Reports to Shareholders, 1981–1984.

  Index

  Agriculture Department, U.S., 217–218

  American Newspaper Publishers Association (ANPA), 360–361

  American Telephone & Telegraph Company (AT&T):

  board of directors of, 111–112, 299–302, 306–308

  Brown’s changes at, 135–136

  “central services organization” of, 309

  competitive pressures on, 10–15; see also competition

  computer entry of, 372

  decline in quality of “pots” at, 7–8, 10, 11, 46

  Eisenhower administration and, 230–231

  future of, 368–372

  “government relations” office of, 9

  headquarters building of, 22, 364

  jokes and satire about, 7–8

  Justice department investigations of, see Justice department, U.S.; U.S. v. AT&T; U.S. v. AT&T trial

  Litton antitrust suit against, 131, 236

  lobbying efforts of, 83–85, 93–102, 110–111

  Long Lines department off, see Long Lines department

  manufacturing subsidiary of, see Western E
lectric Company

  marketing department organized by, 107–109, 111

  MCI and, see MCI

  as natural monopoly, 45–46, 85, 277, 358

  new realism of, 135–146, 160

  1956 consent decree and, 59, 60, 77, 142, 149, 293–294, 298, 327, 337–340

  operating costs of, 8, 107–108

  political clout of, 90–100

  political naïveté of, 348

  Presidents’ Conferences of, 5–15, 22, 39, 103, 192, 301, 319–321

  profits of, 8, 11, 13, 85–86, 107–108, 368

  public relations of, 291–293, 307, 313–316, 332, 333, 335, 347, 348

  as public trust, 6, 10, 40–41

  red team vs. blue team at, 102–112, 122, 135–137, 169, 272–274

  reorganization plan of, 362–363

  research and development of, see Bell Laboratories

  size of, 6, 42, 48, 78, 193, 373

  stock of, 69, 71, 152, 368

  see also local operating companies; specific companies

  Anderson, Kenneth, 114–122, 136–146, 150

  background and personality of, 114–116, 121–122

  Connell compared to, 162–163

  Greene and, 129, 130–131

  Levy’s visits to, 119–122

  Otter Tail case and, 115, 116, 129, 131

  resignation of, 138, 149, 162

  secret settlement attempted by, 138–146, 269

  Trienens’ meetings with, 121, 136, 140–146

  Verveer compared to, 115–117, 121

  ANPA (American Newspaper Publishers Association), 360–361

  answering machines, 11, 92

  antitrust law, 20–21, 23, 25, 27–35, 56–82, 106

  Baxter’s views on, 316–317

  “essential facilities” doctrine in, 20–21

  IBM case and, 116, 117, 128, 131, 316–317, 334

  Litton case and, 131, 236

  Otter Tail case and, 23, 115, 116, 131