The Deal of the Century

The Breakup of AT&T

Steve Coll

• Publisher: Open Road Media
• Year: 2017
• eBook ISBN: 9781504045032
• Topic: Business
• Subtopic: Media & Communications Industry
• Index: Business

A New York Times–bestselling author's "superbly reported" account of the dismantling of the world's largest corporation ( The Washington Post).
Written by the two-time Pulitzer Prize–winning author of Ghost Wars and Private Empire, The Deal of the Century chronicles the decade-long war for control of AT&T.
 
When the US Department of Justice brought an antitrust lawsuit against AT&T in 1974, the telecommunications giant held a monopoly on phone service throughout the country. Over the following decade, an army of lawyers, executives, politicians, and judges spent countless hours clashing over what amounted to the biggest corporate breakup in American history. From boardroom to courtroom, Steve Coll untangles the myriad threads of this complex and critical case and gives readers "an excellent behind-the-scenes look" at the human drama involved in the remaking of an entire industry ( The Philadelphia Inquirer).
 
Hailed by the New York Times Book Review as "rich, intricate and convincing," The Deal of the Century is the definitive narrative of a momentous turning point in the way America does business.
 
 

The Deal

Chapter 13

The New Realism

Early in 1979, John deButts cleared out his personal belongings from his luxurious suite of offices on the twenty-sixth floor of 195 Broadway. Charlie Brown, the new chairman, was ensconced in a considerably smaller and less ornate office around the corner. Most people assumed that Brown would do what every new chairman had done before and move into the vacant suite. After all, deButts’ office, with its spectacular view of Manhattan on three sides, its antique tables, couches, and silver service, was both an opulent perk and a potent symbol of authority and leadership. But weeks passed, and Charlie Brown stayed put. When some of his fellow executives asked him about the suite, he said that he liked his own office just fine. That was all there was to be said on the subject, too. Charlie Brown did not elaborate on his personal likes and dislikes, even to colleagues with whom he worked closely day-to-day. So for a time the plush deButts suite just sat there, unoccupied, like a didactic museum depicting the excesses of a renounced historical episode.

And very quickly it became obvious that the changes at AT&T under Charlie Brown’s reign would extend far beyond the style of the company’s new leader. The blue team was in control now, and its first objective was to end AT&T’s rearguard battle against competition, especially in the phone equipment business. Just weeks after formally taking office, Brown laid out his plans in a speech to a group of telephone executives. “Already it has been a decade since the Carterfone case opened the telephone network to equipment competition,” he said. “But the world has not come to an end. Nor does the sky show imminent signs of falling. Competition is here and it’s growing. As a consequence, there has developed in our business a ‘new realism.’

“The new realism has changed the way we look at the world. No longer do we see the telephone industry as locked in mortal struggle with the equipment industry on the one hand and the specialized common carriers on the other. Rather, we see ours as a single industry encompassing all of us.…

“Ma Bell is a symbol of the past. No longer is a steady dividend sufficient. Today’s investor looks to the prospect of improvement. Today’s employees reject maternalism; they’ll take care of themselves. Today ours is a business that knows that it is not we, AT&T, but the customer who knows best. Mother Bell simply doesn’t live here anymore.”

The central problem that Brown faced was that, while he might be willing to forget the past, Bill McGowan, Ken Anderson, and Harold Greene were not. Brown understood this well, and he knew that to disentangle his company from its sticky antitrust problems, he must be willing to pay a price. From his meeting with Howard Trienens, Ken Anderson already suspected Brown might be willing to make a deal—even a “severed limbs” deal—in order to extricate AT&T from the threat of the government’s case. But Anderson was not yet ready to consider such a solution. With Greene now running the case, things were moving in Justice’s favor. For his part, Brown still faced obstacles to a settlement within AT&T’s corporate ranks. The biggest problem was that Mark Garlinghouse, deButts’ chief legal advisor and a staunch red team holdover, had not followed the mentor’s lead by retiring early. That meant Howard Trienens could not yet take full control of AT&T’s legal strategy. For a decade, Garlinghouse had stood hard and fast with deButts against any compromises on the competition issue. Some lawyers with the Justice department felt that it was really Garlinghouse, not deButts, who was the root cause of the phone company’s antitrust problems. If Garlinghouse had urged more caution during the early 1970s, the government lawyers thought, then deButts might have been able to get away with his “public interest” objections to competition. As it was, AT&T had made itself look foolish: it had gone way overboard when it did things like disconnect MCI’s customers and insist that all “foreign attachments” be equipped with PCAs. The government lawyers believed that if Garlinghouse had thought through the antitrust implications of such actions, and if he had been able to persuade deButts that the actions were unwise, Justice might not have a case at all, and AT&T might still have held off some competition. In any event, the hard-liner Garlinghouse was about the last person at AT&T who was going to go looking to make a deal with the government. Until Trienens took full control of the legal department in January 1980, when Garlinghouse was due to retire, it would be difficult for Brown to pursue a settlement actively.

Just a few months before then, however, a series of events inside the government created an unexpected opportunity for AT&T to dispose of the antitrust suit. As would often be the case during the next three years, the settlement opportunity derived as much from the personal lives and internecine relationships of the government’s lawyers as from the substantive economic and antitrust issues caused by telephone industry competition.

During the summer of 1979, Ken Anderson’s vigorous and bucolic life on his Virginia farm took a turn for the worse. A child who lived next door to the Andersons died unexpectedly. Then, just a few weeks later, a neighbor was killed when he fell off his tractor. The events triggered some painful feelings in Anderson’s wife, a woman who had known a very difficult childhood in the Bedford-Stuyvesant section of Brooklyn, New York. As the summer progressed, she began to have difficulty sleeping, and she felt anxious and depressed. Anderson tried to talk with her, but he was distracted by his heavy workload at the office: not only was he in charge of U.S. v. AT&T, he was also still chief of the Antitrust division’s Special Regulated Industries section. Often he was unable to leave the city until well after dinner time. As the summer gave way to fall, the condition of Anderson’s wife deteriorated. To pay for her medical expenses, Anderson began to borrow heavily from the Justice department’s credit union. By November, Anderson was emotionally drained and deeply in debt. Perhaps irrationally, he felt that the long hours he worked at Justice had contributed significantly to his wife’s problems. Most of Anderson’s colleagues were unaware of his distress. Occasionally one of them would find Anderson standing bleary-eyed in front of the office coffee machine early in the morning and would ask how he was doing. When Anderson unburdened himself of his problems, he seemed a far different person from the tough-talking, gutter-fighting litigator his colleagues knew professionally. So when Anderson announced in November that he was resigning his Justice position to take a more lucrative, less demanding job in private practice, it was a decision that some of his colleagues understood and respected.

Anderson told the Antitrust division’s front office that his resignation would be effective at the end of January 1980. What he didn’t tell them was that in the interim, while they were searching for a new lawyer to run the AT&T case, Anderson was going to try to settle the lawsuit.

Among the small team of lawyers working on the AT&T case, various motives were ascribed to Anderson’s secretive settlement attempt late in the fall of 1979. Some said that Anderson felt guilty that he was abandoning the case just as it was beginning to heat up again, and that the settlement initiative was therefore an attempt to atone for his sudden departure. Others described the effort as more of a selfish “swan song,” an attempt by Anderson to take credit himself for the outcome of the case before he left the department.

Anderson himself claimed two different motives. First, he said the “taffy pull” over AT&T between the FCC, Congress, and Justice was probably not in the public interest. If there was a way to conclude the matter fairly, he was now in favor of doing so. Second, Anderson did not trust the Antitrust front office to prosecute the case vigorously after he left. The politically appointed Antitrust chief’s slot was vacant at the time because of John Shenefield’s promotion to associate attorney general. That meant the front office was run mainly by career lawyers, particularly an attorney named Don Flexner. Anderson and Flexner detested each other. Flexner was a leading advocate of the “Anderson is a loose cannon” school of thought within the division. He felt that Anderson had handled some aspects of the AT&T case in a sloppy manner, especially the question of relief. The telecommunications industry had changed dramatically since the lawsuit was filed in 1974, but Justice had never reconsidered its goals in the case. The original relief contentions seeking divestiture of Western and all the operating companies had been something of an internal compromise back in 1974, a way to reconcile two different teams of Justice investigators. With Judge Greene now pushing to take the case to trial, Flexner and others in the front office felt that it was time for a serious reevaluation of the case. What did Justice want from AT&T? Why? How would the arguments be presented in court? The front office felt that these were questions that Anderson, preoccupied with his expedient pretrial tactics, had grossly neglected. So Flexner had taken some lawyers from a different Antitrust section and had created a Relief Task Force, whose charge was to evaluate the case and make specific recommendations about what Justice should seek when the suit went to trial. The task force irked Anderson and his key lieutenants, especially since it had been created by Anderson’s enemy, Flexner. To make his feelings clear, Anderson hung a Goya print on his office wall. The painting depicted a firing squad with their rifles aimed at a group of prisoners. One of the prisoners was already lying on the ground in a pool of blood. Someone on Anderson’s team of lawyers taped a note to the painting that said, “Relief Task Force,” though the note did not indicate whether the task force was supposed to be the firing squad or its victims. Anderson’s private settlement proposal was a way to steal the task force’s thunder and to preempt a more visible role for Flexner in the case.

The question for Anderson was, What should his offer to AT&T be? There was no doubt that without some divestiture by the phone company, no deal could succeed; an injunctive settlement would look like a sellout to both the Antitrust front office and the public. AT&T would have to sever a limb or two. So late in the fall, Anderson called Howard Trienens, who was by now working at 195 Broadway, waiting to succeed Mark Garlinghouse as Charlie Brown’s vice-president and general counsel.

Anderson told Trienens that he was resigning for personal reasons and that before he left he thought the case should be settled. “The first question to you guys is, Are you prepared to accept divestiture of something? Because if you’re not, I’ve got to go out and find a job. I’ve got other things to do.”

Trienens said that he would have to talk with AT&T’s chairman.

Not surprisingly to Trienens, Brown told his general counsel-to-be that he was willing to explore any realistic settlement framework. He instructed Trienens to meet with Anderson. Neither Brown nor Trienens, of course, knew that Anderson was acting on his own. They both assumed that the Antitrust front office had approved, and maybe even had insisted upon, Anderson’s unexpected overture.

Within a few weeks, Trienens flew to Washington and met with Anderson and some of his staff at the Justice department.

Anderson’s key lieutenants were two young government lawyers named Alexander Pires and Peter Kenney. Pires had been hired personally by Anderson, and he was similar to his boss in many respects. The son of Portuguese immigrants, Pires had been a boxer in Boston before entering law school, and he took a pugilistic approach to his profession. He was a large, barrel-chested man with a square jaw and curly black hair. Like Anderson, his specialty was litigation tactics, and when he talked about the AT&T case, he sometimes used phrases like “bloody limbs” or “knockout punch.” Kenney contrasted sharply with the styles of Anderson and Pires. He actually had been hired by Phil Verveer just before his resignation, and he was more like Verveer than Anderson. Kenney was careful, detailed, and organized, and though he was no zealot about politics, he did have liberal views through which he filtered and measured the AT&T case. His thoroughness acted as a kind of counterweight to the urgent expediency of Anderson and Pires. Kenney was the one who had a firm grasp of the case’s technical, economic, and legal details; it would be very difficult for Anderson to negotiate a deal without him. But neither Kenney nor Pires was entirely comfortable with Anderson’s decision to fly solo on a settlement proposal to AT&T. The two lawyers were both going to be around after Anderson left, and they wanted to continue the case. Pires hoped to take over Anderson’s job. Neither of them felt that Anderson, under the circumstances, was likely to get much divestiture from AT&T, and they knew that even if he did, there would be hell to pay when the front office found out what Anderson had done.

Howard Trienens knew none of this when he arrived at Ken Anderson’s office that winter to discuss a settlement. If he had, he might very well have turned around and flown back to New York. But since Trienens believed that Anderson represented a united front at the Justice department, he took the negotiations seriously.

Anderson began by presenting Trienens with a document, undated and typed on plain white paper, that was referred to as “the menu.” It was a list of ideas about how AT&T and the government might settle the antitrust case in the public interest. The menu was the brainchild of a lawyer named Ken Robinson, who had worked for a while in the Antitrust division under Anderson. Robinson had left Justice earlier that year to work for the Commerce Department’s National Telecommunications and Information Agency (NTIA), the executive branch office in charge of telecommunications policy. Robinson was not well liked by most of the Antitrust lawyers who worked on the AT&T case. He was seen as a kind of impractical academic, a man more interested in ideas than law. Moreover, he was regarded as a closet AT&T sympathizer, someone who displayed no sense of outrage about AT&T’s anticompetitive acts during the early 1970s. In fact, Robinson later made it plain that he thought the government’s suit against the phone company was a serious mistake. When he arrived at NTIA in 1979, Robinson quickly began to develop ideas about how the suit might be settled, and he sent them over to Anderson, who happened not to be one of the Antitrust lawyers who regarded Robinson with suspicion.

When Anderson and Trienens looked over the menu together, they agreed that it contained some ideas that might form the basis of a realistic settlement. Ideally, any settlement would accomplish three things: it would enhance phone equipment competition, it would allow long distance competitors like MCI equal access with AT&T to the phone company’s local exchanges, and it would not seriously disrupt the high-quality, low-cost telephone service enjoyed by the American public. From Trienens’ point of view, that meant that while AT&T could accept some divestiture, a settlement would have to stop far short of the total breakup of Western Electric and all the basic operating companies, which the government was seeking in its lawsuit. Anderson, on the other hand, needed a couple of severed limbs both for their symbolic political value and as a means to ensure that AT&T did not revert to anticompetitive practices in the future. In 1956, after all, Justice had accepted a deal that contained no divestiture, and less than twenty years later it had been forced to sue AT&T again over many of the same competition issues.

There were three ideas on Ken Robinson’s menu that seemed to fit both Trienens’ and Anderson’s criteria for a settlement. They were known as “the crown jewels,” “the bellwether approach,” and “the United Fruit approach.” Combined, they would form the basis of a deal far more palatable to AT&T than the Draconian divestiture being sought in the lawsuit.

Among AT&T’s twenty-two basic operating companies, there were four or five that were large and prominent enough to be considered “crown jewels”: Pacific Telephone, Illinois Bell, Southwestern Bell, New York Telephone, and perhaps Southern Bell. All of them had assets worth more than $5 billion, and annual revenues greater than $1 billion. For starters, the menu suggested that AT&T divest itself of one of these “jewels.” Among the four or five, there was one obvious candidate: Pacific Telephone. Considering its size, Pacific was easily the worst performing operating company in the Bell System, mainly because of tough local regulations in California. The company was burdened by a huge debt and its profit margins were low. Trienens told Anderson that if AT&T was to sacrifice a jewel, Pacific would be the one. Anderson agreed. Pacific’s $14.5 billion in assets made it the largest of all AT&T’s operating companies, and thus it would be a fine prize for the Justice department.

The idea behind the crown jewel divestiture was called “the bellwether approach.” Bill McGowan had complained from the beginning that the Bell operating companies discriminated against MCI because they were owned by MCI’s main competitor, AT&T. McGowan said that no matter how many rules were written about equal access to local exchanges and no matter how many times AT&T claimed to have renounced its anticompetitive ways, MCI would still face a structural disadvantage in competition with AT&T because the phone company owned all the local exchanges. But rather than divesting all the operating companies and drast...

Table of contents

• Cover Page
• Title Page
• Dedication
• Contents
• The Shape of AT&T on May 8, 1972
• Local Operating Companies
• Cast of Characters
• The Case
• The Deal
• Aftermath
• Notes and Sources
• Index
• Acknowledgments
• About the Author
• Copyright Page