Quiet Firings Spur Renewed Telecom Takeover Talk

Dogged by falling prices, the big long-distance carriers are cutting jobs once again. But an uncharacteristic silence surrounding the latest moves suggests this is more than the typical tail-chasing.

These companies, namely AT&T and WorldCom , have spent recent years slashing costs in an effort to preserve profitability. Thousands of jobs have been quite publicly eliminated as the companies, waging an unceasing battle with plunging prices, sought to quiet critics on Wall Street.

But now the cat's got management's tongue at AT&T and WorldCom. Recent published reports indicate that both have fired hundreds or even thousands of workers without telling investors. The shift to stealth firing suggests at the very least that earlier cost-cutting efforts failed to revive business as hoped, and perhaps that the companies are primping for would-be suitors.

AT&T representatives declined to comment on whether the company is for sale. But CEO C. Michael Armstrong told a gathering of investors this month that he believes consolidation continues to be a fundamental principle in the industry. Meanwhile, WorldCom chief Bernie Ebbers has recently soured on his company's buyout chances. Last month Ebbers groused to investors and analysts that the lengthy regulatory review and business realignment process tends to be a deal killer.

Of course, any sale of the long-distance companies would probably come as a balm to investors who have been chafed by years of red ink and stock stagnation. But the implicit desperation of the new silence may further undercut these companies' already bleak takeout prospects.

Turnabout, Fair Play

AT&T, which this summer forcefully denied a report in TheStreet.com indicating that 10,000 to 15,000 cuts were in the works, is on track to hit that range by year-end, according to reports in The Wall Street Journal and Reuters. Excluding wireless operations, AT&T's headcount has shrunk to 124,000 now from 130,000 at the start of the year. According to the reports, which sourced people familiar with the company, some 4,000 more cuts are expected.

Lockstep Revenue, workforce falling at AT&T

Sources: Lehman Brothers, Securities Exchange Commission filings. *Lehman Brothers estimates. **Detox calculations.

Hogwash, says AT&T. "We're not communicating headcount figures to anyone," says a company spokesman. "There hasn't been a single event we can point to where we cut a certain number of jobs."

The New Jersey phone and cable giant isn't alone in its silence. Just over a week ago, WorldCom sent employees packing with little more than an 800 number to call to find out what severance and benefits they could expect.

A WorldCom spokesman said the cuts were part of an unannounced plan to trim 900 jobs, mostly technical positions related to capital spending cuts. The nation's No. 2 long-distance company, which reduced its European staff by 1,000 last month, didn't deem the recent cuts substantial enough to warrant an announcement.

But a former WorldCom employee who was fired this month disputes the 900-employee figure, saying that the word among colleagues put the layoffs in the thousands. "I don't think 900 is even enough to be the bandage on what WorldCom is trying to accomplish," says the former employee. WorldCom had 75,000 workers as of September, down 2,000 from the start of the year.

The Usual Suspects

Recently announced employee cuts and buyouts at SBC and Verizon typify the early stage of the cost management process. These sorts of cutbacks enable management to appear aggressive in taking on a company's ills without conceding that the problems are insurmountable.

But layoffs without formal announcements suggest the illness has gotten out of hand, some observers say. To investors and analysts trying to predict a company's financial performance, the stealthy layoff plan can suggest a company hasn't got a handle on fundamental problems causing sales and profit erosion.

"If you look at their activities over the past few years, it seems the only way they've been able to manage their bottom line is through cuts," Giga Information Group analyst Lisa Pierce says of AT&T. "A lot of expertise walked out the door with the voluntary retirement packages, so shedding more talent would be a great concern to analysts and customers alike."

Three years ago, AT&T's cost-cutting strategy began in earnest, as 15,300 workers were lured off the payroll with generous early retirement packages. At the time, AT&T sought to reduce overhead costs to 22% of revenue from 33% or more.

By 1999, sales, general and administrative costs for the business and consumer phone divisions had dropped to 16% of revenue, by some estimates. But as revenues continue to fall, overhead costs remain a constant burden.

"They've driven down the costs, but the fact that they are still cutting looks like they aren't doing good financial stewardship," says Thomas Weisel Partners analyst Jim Linnehan, who has a hold rating on AT&T and a strong buy on WorldCom. Weisel hasn't underwritten for either company. "It's really a thin veil over a much deeper problem."

As Linnehan points out, AT&T business services revenues, for example, have declined every quarter for the past year; if you throw out a slight uptick in the third quarter last year, the decline is nearly two years running. To make matters worse, while business services sales fell about 5% in the last 12 months, cash flow during the same period plunged a staggering 25%.

That means many blue-chip corporate customers have either fled or downgraded to cheaper AT&T service plans, says Linnehan.

AT&T maintains that the thinking behind the cuts is well understood.

"I think it's been pretty obvious what's going on with the economy and the continued slide in long distance," says an AT&T spokesman. "I think most analysts are very familiar with that. We're not playing any games here."

Can't Run

One group AT&T can't hide its layoff plans from is its big union, the Communications Workers of America. AT&T recently told the union that it could cut 2,400 union workers, roughly 10% of the CWA's total AT&T membership. CWA has already seen its AT&T membership plunge by more than 40% in three years.

"One thing that's different with AT&T this time is that they are truly trying to cut costs rather than simply make an impression on Wall Street," says Jeff Miller, spokesman for the CWA. To Miller this has all the makings of a presale cleanup.

"They are doing everything to slash payroll," says Miller. "They're slashing costs and they're paying off debt. They seem to be positioning themselves to sell the company."

Every dog has its day.