AT&T'S SECOND-CHANCE CEO

By John Greenwald

If a printer can't run AT&T, perhaps a defense contractor can. Using that logic, directors of the phone giant last week handed the top job to C. Michael Armstrong, 59, chairman of Hughes Electronics, ending one of the most embarrassing corporate head hunts in recent memory. The board tapped Armstrong three months after disconnecting AT&T president John Walter as the designated successor to the embattled Robert Allen, 62, who is stepping down as chairman and CEO. Directors said Walter, who was plucked from printer R.R. Donnelley & Sons last year, lacked the "intellectual leadership" to head the seventh largest U.S. company.

In fact, AT&T's board and brass are the ones whose intellectual wattage seems to be dimming. The company's stock price has been listless all year despite the bull market, as AT&T has stumbled from one misadventure to another. Its costly drive into local phone service has been stymied, and its steadily falling share of the $70 billion long-distance market is down to 50%.

"Defense contractor" does not begin to describe Armstrong. Formerly with IBM, he is a shrewd marketing executive who will bring a hands-on style of management to a company that has begun to resemble a helpless giant. At Hughes, Armstrong spun off the automotive parts and defense businesses to bring the company to the cutting edge of the satellite and telecommunication industry. The market voted its quick approval of his latest move. After the story broke on CNBC last Friday, AT&T's stock rose 3.7%, to $45.19, while the rest of the market had a dismal day.

Colleagues describe Armstrong as even-tempered and thoughtful. He can charm those whose favor he needs to cultivate while being rather cold with subordinates. And he does not suffer fools.

Armstrong spurned an overture from AT&T last year because Allen, who earned $3.22 million in cash compensation in 1996, refused to step aside as boss. The board then hired Walter, who was willing to play second fiddle until Allen retired at the end of this year. But Allen short-circuited the arrangement last summer by recommending against giving Walter the CEO job. When Walter stomped out, the board launched a new search that--surprise!--turned up Armstrong again.

The choice reportedly came down to Armstrong and vice chairman John Zeglis, 50, a veteran AT&T attorney who helped devise the breakup of the old Ma Bell. In a Solomonic decision, the directors named Zeglis president and chief operating officer, with a clear shot at running the company when Armstrong steps down. By then this American institution will be either ringing up better numbers or calling for an undertaker.

--By John Greenwald