Walter, AT&T; Part Company After Only Eight Months

AT&T; Corp. faced another crisis of leadership and direction Wednesday after President John Walter resigned because the company backed out of its promise to make him chairman and chief executive.

Walter, 50, joined the nation’s largest phone company eight months ago following a prolonged search for a successor to Chairman Robert Allen as chief executive. Walter, who had been CEO of R.R. Donnelley & Sons Co., the giant printing firm, had been expected to succeed Allen in January 1998 as chief executive and in April as chairman.

But AT&T;’s eight independent directors, with a recommendation from Allen, voted unanimously over the last two days to deny the promotion to Walter, saying he “lacked intellectual leadership.”

“It may well be that we erred in asking John to take on this responsibility in the first place,” director Walter Elisha said. “We obviously thought he could do it.”

In a statement, Walter reacted with disappointment.

“I believe I am perfectly qualified to be CEO of AT&T; right now,” he said. “I have worked tirelessly on behalf of the shareholders of AT&T.;”

Although Walter had no experience in telecommunications, he was handpicked by Allen because of his success in leading Donnelley, a publisher of phone books, into electronic publishing and Internet business.

In his brief stint as AT&T; president, Walter launched an effort to cut $3 billion in costs and began a program to integrate AT&T;’s many services--long-distance, cellular and wireless telephony, and Internet--into a single package for customers.

But in trying to integrate these services, telecommunications experts say, Walter ran afoul of executives in charge of the phone company’s many divisions. Those executives were able to appeal over his head to Allen, sources say.

Also, Walter made no secret of his opposition to AT&T;’s bid, launched by Allen at the end of May, to merge with SBC Communications Inc., the holding company for Southwestern Bell and Pacific Telesis. That proposed $50-billion merger, which would have brought AT&T; back into local phone service, fell apart last month amid protests from regulators and an disapproval from investors.

AT&T; has been losing long-distance customers to rivals and spending billions of dollars to get into wireless and local phone service, without much success. It may try for another acquisition soon, telecommunications analysts speculated. Teleport Communications Group, a New York-based provider of local telephone service, is mentioned by analysts as an acquisition candidate.

But first AT&T; needs to decide on a future chief executive. Walter’s departure comes on the heels of several high-level defections.

“AT&T; right now needs somebody creative, with vision about technology--they need Craig McCaw,” said consultant Peter Bernstein of Infonautics Inc., a research company located near AT&T; headquarters in Basking Ridge, N.J.

McCaw, the cellular phone pioneer who sold his company to AT&T; in 1994 for $11.5 billion, is a major owner of AT&T; stock.

In this crisis, however, AT&T; put Vice Chairman and General Counsel John Zeglis in charge of operations. Zeglis, who appears to be a leading candidate to succeed Allen, has been with AT&T; since 1984, the year of the historic breakup of the Bell system.

Zeglis’ promotion indicates that AT&T; wants an experienced hand in legal and political negotiations to navigate a new merger with a local phone company, analysts said.

Analysts expressed dismay at the latest turn of events.

“The company seems to be out of control,” said Brian Adamik of Yankee Group in Boston. “Management defections, failed mergers and not maintaining position in core business--those are serious problems.”

“AT&T;’s problems go far beyond who happens to be the head,” said Steve Koppman, senior analyst at Northern Business Information in Oakland. “I am not sure if you put a monkey in charge that they would lose market share any faster.”

Walter will get $3.8 million for losing out on the top job, in addition to the $22 million he was paid to leave his previous job.

Elisha said Allen has agreed to stay on as long as it takes to find a new successor but gave no timetable. He said the new candidate would take over immediately, without an apprenticeship period like Walter’s.

Following the news of Walter’s resignation, AT&T;’s stock rose $1.31 in the final minutes of trading to close at $36.31 on the New York Stock Exchange.