CRISIS MANAGEMENT, As Walter walks, AT&T's Allen loses yet another successor

AT&T Corp.'s indecorous ouster last week of its president, touted as the heir apparent to Chairman and Chief Executive Officer Robert Allen, may finally shake the carrier into facing harsh market realities.

John Walter, hired nine months ago from Chicago-based printing company R.R. Donnelley & Sons, left with a $25 million severance deal and a defiant statement that he was "perfectly qualified to be CEO of AT&T right now."

But AT&T's eight independent directors voted unanimously not to elect Walter CEO by January, the date specified in his contract and by which Allen had agreed to retire. Allen may now serve longer - perhaps until March - to give the board time to find a new CEO, said Walter Elisha, the director who spoke at a news conference about the developments last week.

However, the next leader will take Allen's job as soon as that person is hired, said Elisha, one of the five directors who comprise a committee that will conduct the search.

Elisha told reporters that the directors may have made a mistake in hiring an industry outsider for the job and that they had become "increasingly concerned [whether Walter] could provide the intellectual leadership to lead AT&T.

Although Allen supported Walter on a number of occasions, their relationship had become strained, partly because Walter reportedly balked at AT&T teaming with a local exchange carrier. Allen cut Walter out of AT&T's merger talks with SBC - talks that ultimately went nowhere. Finally, Allen recommended that the board reject Walter as his successor.

The hiring was controversial and unpopular on Wall Street from the start. Even so, it was not the first time Allen has lost his No. 2 man.

Industry analysts said the AT&T shakeup, along with BT shareholders' anger about MCI's unexpectedly large losses in the local market (see story on page 7), may reflect a sudden realization by interexchange carriers that there is a lot more to entering the local market than getting regulatory permission.

The large IXCs must map out long-term strategic plans that go beyond scrambling for consumers' dimes, analysts said. The Telecom Act of 1996 "seems to seriously call into question" whether the IXC competitive model can be sustained, said Brian Adamik, an analyst with The Yankee Group.

Indeed, technology and competition have steadily eroded the margins on the IXCs' unit sales of telephony minutes, said Tom Nolle, an analyst with CIMI Corp., Voorhees, N.J. He likened the situation to "the Armageddon" of the long-distance carriers. "There isn't going to be any radical improvement in the minute market any time in the foreseeable future," he said.

Names of potential replacement CEOs already surfacing last week include Allen confidant John Zeglis, an AT&T vice chairman and former general counsel who has assumed Walter's responsibilities; George M.C. Fisher, chief executive of Eastman Kodak who recently joined AT&T's board; and Dave Dorman, president, chairman and CEO of Pacific Bell.

Dan O'Shea and Jason Meyers contributed to this report.