DSL Prime: All Eyes on SBC

As SBC prepares to change CEOs, DSL Prime predicts the business strategy of the likely successor. But who will call SBC on all its lies?

by Dave Burstein DSL Prime [May 19, 2004]

SBC: Talking Strike Over DSL Jobs
Union President Mo Bahr points out the issue. "Our job security depends on getting the work in Voice over the Internet, Wi-Fi, Data Comm, Internet services and all the other jobs of the future." Besides the union issue (I don't think they'll ultimately pull the strike), SBC needs to improve service. Ed Whitacre and now Randall Stephenson control 1/3 of U.S. phones, and now Bill Daley is going.

Bahr says SBC financial filing inaccurate and misleading
A second stumbling block is health care. "SBC chose to put something out that is not accurate and that will cause retirees unnecessary worry." CWA President Mo Bahr "was outraged by the company's inaccurate and misleading account of the tentative agreement CWA and SBC reached on retiree health care."

Bahr may have been speaking in anger in the middle of contract negotiations, infuriated because the information (reported by Todd Wallack in the SF Chronicle) apparently contradicted what he was telling his members.

In theory, companies are reluctant to lie in SEC filings, because penalties are potentially severe. In practice, unless and until a Nortel or Enron type scandal applies, the SEC does little about mis-statements. I've several times noted material misrepresentations by companies like this that go unopposed. The SEC leaves the enforcement to plaintiffs' lawyers, who can't match the corporate defense resources without a clear pattern of fraud and losses. My original headline used a plain word, not "inaccurate and misleading." I changed it at a union request "in solidarity." It's hard for this writer to refuse a request like that.

Heir-apparent Randall Stephenson
No one at SBC dares to talk publicly about Whitacre's pending retirement, beyond affirming his contract continues two more years. No surprise, therefore, that CFO Stephenson's appointment as COO and logical successor was sent over the wires late Friday afternoon, the best time to bury a news story. Whitacre anointed the young (44) but highly loyal CFO Stephenson, and made clear in the release Group Presidents John Atterbury and Ray Wilkins will report to him. Stephenson, like Whitacre, in a Southwest Bell lifer who worked his way up. He studied accounting at the University of Central Oklahoma and got his masters from the University of Oklahoma.

Makes tough decisions
Stephenson recently took credit for SBC's very modest severance payments, while criticizing Verizon for being too generous to discontinued employees. Verizon paid a very high price for (relative) generosity, so much that Verizon New York showed a loss on the books for the year. Layoffs will be continuing at the bells, and he's one for the cold equations.

Less visibly, Stephenson as CFO has slowly been reducing SBC's wireline and global businesses. He's cut back investment to less than annual depreciation. SBC is selling assets (Bell Canada, Belgacom gone, Telkom South Africa for sale as soon as practical, etc.), and using the cash to raise dividends twice in a year and buy back stock. The result is a diminished company, an enormously difficult change in strategy from the growth plans of three years ago. (Whitacre around 2000: We are an Internet company too.)

Can Stephenson get the big job?
A CFO without support from Wall Street would seem an impossible choice to run a major company. Merrill recently put an extremely rare sell rating on the stock, and Standard and Poors is driving down credit ratings amid concerns about quality of earnings. Most telling is the $19 billion gap in market cap compared to Verizon. For several years before Stephenson took over in 2001, the market cap of Verizon and SBC stayed parallel and nearly identical. SBC has much less debt, Verizon a better wireless operation, but otherwise they match remarkably closely. So the gap between the stock prices reflects a judgment on management choices, as SBC has cut back capex much further, while Seidenberg has convinced the street Verizon will more effectively face the future. This is really clear from this chart.

(The first time I wrote about the gap and thought it far too much at $20 billion, the companies soon were $30 billion apart. So please read this item as a report of Wall Street sentiment, not a suggestion to go long SBC and short Verizon.)

SBC has more write offs to come, most conveniently when a new CEO, not part of the old management, takes over and can blame it on his predecessor. Whitacre has firm control of his handpicked board, and it would take a remarkable intervention to displace him or his choice. Consider board member Gussie Busch, who was on the SBC compensation committee awarding Whitacre $91 million a year while Big Ed was on Anheuser-Busch's board setting Gussie's pay in turn. Whitacre and Busch also were on the Emerson Electric board, whose Chairman, Charles Knight, is on the SBC board. U.S.A. Today reported this as the only triple connection in American business. But Carlos Slim Helu of Telmex just bought another million shares, and with the size of his investment I'd expect Slim to play a strong role in the final decision.

Ray Wilkins
Insiders thought Ray Wilkins had the best chances after recent marketing successes. He's smart, hard-charging, and by far the most popular of SBC senior managers. He now figures to be on the short list for many industry positions, on the assumption he might fear being passed over.

Bill Daley, will you please come home?
I'd like to think Bill Daley is leaving SBC because he couldn't develop a strategy to win the next battle. SBC and the other Bells are about to request a massive, government-enforced price rise while the costs of delivering service are plummeting. Hard to justify taxing every American family for a bailout of a company paying Big Ed $50 million a year and telling Wall Street they are immensely profitable. More likely, he is leaving because even an excellent effort on his part couldn't deliver what his boss expected. In Washington, his task was to both protect a monopoly and get deregulation because "we already have too much competition." In the midwest, he was expected to bring home rate increases despite the massive service breakdowns when SBC pushed out too many Ameritech workers.

"Daley plans to announce a new position with a Chicago employer," Jon Van predicted, and the news has just come that Daley will be Chairman of the Midwest for JPMorgan Chase. The Chicago Tribune reporter suggests Daley wants to leave San Antonio and return to the town his brother leads and his father ruled. Rumors are floating that Daley left because of Stephenson's rise, but it's likely he realized long ago (as Wall Street did) that he had been pigeonholed into a spokesman job and wasn't developing the relevant experience needed for a shot at the CEO job.

Daley's mother worked as a telephone operator, exactly the kind of job SBC is now eliminating.

Editorial: Regulators need the facts
Kevin Martin deserves kudos for trying to get the information to do his job right. SBC should be replacing whoever decided to assail the FCC for asking about the terms SBC was offering CLEC Talk America, and their imperious demand the FCC destroy all the evidence. SBC's belief that regulation is best made in ignorance serves only to promote bad policy. Most of the time neither regulators nor reporters make the time to get the facts, and far too many decisions are made based on "information" from telcos with heavy spin and often untruths.

SBC knows well the legal requirement to file interconnection agreements, and has already been reminded of it officially by three states. SBC thinks that's not the best process, but it's the law and has a strong basis in precedent. So their requirement that Talk America sign a "confidentiality agreement" is an obvious breach of the law, and would be thrown out by a knowledgeable judge as "against public policy"—a judicial euphemism for "illegal." They also know that Talk America would be out of business before the case could be decided, and had no choice but to sign whatever SBC requires.

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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