Why SBC bought AT&T

OK, there were strategic reasons that motivated the $16 billion acquisition of the remainder of once dominant AT&T  by Baby Bell SBC Communications. That deal ended with the birth of a new AT&T  and with a far more concentrated US telephone industry. The new company has a large base in local and long-distance telephone service, (through half ownership of Cingular Wireless) cell phones, and broadband. Only Verizon can contend with the new AT&T  as the real showdown with cable TV companies and media companies gets got.

But here's one of the big motivating factors: it made the CEO of SBC even more insanely rich. We've written about this before, but rarely are the numbers so out in the open. SBC's CEO Edward Whitacre, now CEO of the united company, made out like a bandit after the deal, even in this era of outrageous executive compensation.

According to a Wall Street Journal article (“AT&T  Chief's Pay Jumped Last Year To Over $17 Million”, 2/11/06), the company showered Whitacre with compensation after the merger. Newly released documents from the SEC show that he “earned more than $17 million in 2005, a sharp increase from his compensation during the previous year.”

Here's the breakdown

  • Whitacre's base salary was $2.12 million (not bad).
  • He has handed a $7.13 million bonus.
  • He got $4.8 million in long-term incentive payments.
  • He received, according to the article, “$2.67 million in 'other annual compensation,' which the company described as personal benefits.” (One imagines that includes dry cleaning, really good dental insurance, and a new uniform for his limo driver.)
  • He received $250,000 for miscellaneous items (all those incidentals not covered by the $2.67 million above).
  • Finally, he exercised options to the tune of $137,132, presumably to get a little mad money.

  What's truly mind-boggling is that this $17.2 million in year 2005 compensation represents only a $3 million raise from 2004. Other key SBC execs got smaller but proportional raises. For Whitacre, the incentive to get a deal with AT&T  was overwhelming, whether it turns out be a long-term mistake or a success. The cash in hand, and the prospect of sustained increases in pay for the next few years, along with the ego boost for the CEO, cannot result in impartial, rational decision-making on the long-term interests of the company or the investor.

Mr. Whitacre's case is not unique, though the SEC has recently started putting pressure on US public companies to reveal more about executive compensation. The truth is that, the bigger the company is, the more the CEO gets compensated. And the bigger the deals he makes, the bigger the bonuses and extras. It stands to reason that, in some or even many cases, these big deals get made first, and then the justification in terms of stockholder value are cooked up.   [Oligopoly Watch]

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