Bigger. Better.


Comcast Corp. probably could have received the Bill Daniels Operator of the Year designation for the sheer size of its Nov. 18, 2002, acquisition of AT&T Broadband, for about $54 billion.

While that deal was one of the largest in the history of cable — giving Comcast an unprecedented 21-million-subscriber heft — it is what the Philadelphia-based MSO did after the merger, mostly in 2003, that is most remarkable.

Just nine months on, Comcast had outperformed even its own stated expectations.

Basic-subscriber losses were stemmed. Cash-flow margins (as a percentage of revenue) at the former AT&T Broadband systems had risen. Debt relative to cash-flow size had returned to pre-merger levels.

It's plain to see in the numbers.

Q2 sub gains

Comcast, shrugging off seasonally slow conditions, reported basic subscriber growth of 12,100 for the three months that ended June 30.

The increase was even more dramatic in that it came solely from the former AT&T Broadband unit, which saw its subscriber rolls increase by more than 35,000 customers in the period.

The turnaround at the former AT&T systems also inspired Comcast to elevate what it had been guiding investors to expect of subscriber additions for the year. Instead of no growth or maybe 125,000 net additions, Comcast now forecasts 125,000 to 150,000 net additions.

Pro forma revenue for the entire company was up 10.2%, to $5.7 billion, in the period and pro forma operating cash flow rose 32%, to $1.8 billion, fueled by strong growth in digital cable and high-speed data subscribers.

In the cable division, revenue increased 9.2% and operating cash flow was up 36%, including acquisition and employee-termination costs.

As a result, Comcast increased year-end cable operating cash-flow guidance by $100 million, rising to a range of $6.3 billion and $6.4 billion. The operating cash-flow margin — a percentage of revenue — was 36.5% in the quarter, compared to 29.4% a year ago.

Ahead of pace

The margin improvement was most notable in the AT&T systems: 32.3% margins in the second quarter, versus 21.2% last year.

Comcast's historical systems improved their operating cash flow margins from 42.3% to 43%.

Comcast — which had said it thought the AT&T integration would take about three years — now says that it can be done in half the time — about 18 months.

In the beginning, critics of the AT&T Broadband deal were many, especially since Comcast was biting off a piece of the cable pie that few thought it had the stomach for. Throw in AT&T Broadband's poor past performance — it was losing subscribers by the truckload and had the lowest operating margins in the industry — and many believed privately that Comcast president and CEO Brian Roberts had finally met his match.

"Heading into the fourth-quarter report, which was the beginning of this year, there was a lot of concern about what the company was going to say," Banc of America Securities analyst Doug Shapiro said. "Were they going to say that now that they've got in there, it was much worse than they thought, the integration was going to take a lot longer than they thought?

"Definitely there was a lot of skepticism and a lot of concern. I'd say the consensus was that it was going to take a lot longer to fix than the company had hoped."

No surprise here

But Stifel, Nicolaus & Co. cable analyst Ted Henderson — a former executive vice president of finance and business affairs at Jones Intercable Inc. — said Comcast's success shouldn't have been a shock.

"Am I surprised about how quickly they integrated AT&T? My comment would be absolutely not," Henderson said. "These were underperforming cable assets underneath AT&T that were acquired by a cable operator who does not have a history of underperforming assets. So my expectation was absolutely that they would meet and exceed Street expectations in integrating these AT&T assets."

Still, Henderson acknowledged sensing some trepidation early on among investors, especially because the consensus was that the former Tele-Communications Inc. systems — which AT&T purchased in 1999 and formed the MSO's core, along with former MediaOne Group Inc. systems — were said to be in poor condition.

TCI overhang

"There was a mindset that the TCI systems were in such bad shape that anybody that touched them was going to die," Henderson said. "There was skepticism of whether Comcast could pull this off.

"I could tell you that up until closing, I talked to some very smart money managers that said: 'I just wish they would walk away.' Up until closing time, there were people who felt this was the wrong move."

Shapiro said Wall Street's attitude toward the integration has shifted dramatically.

"I think everybody has been extremely impressed with how it's been done," Shapiro said. "Management themselves continue to express their own surprise at how well they've done. It seems pretty genuine when they say that."

Roberts has always been seen as a bit of a contrarian, and his desire to own AT&T Broadband fits that perception.

Even as some important investors tried to convince him that the acquisition would be a bad move, Roberts and his father, company chairman Ralph Roberts, stuck to their guns.

"One of the assets I believe in my core is that we have a family-oriented stake that allows us to not always go with the consensus of Wall Street at the moment," Brian Roberts said in a Sept. 2 interview at Comcast's corporate headquarters in downtown Philadelphia.

Cellular memories

As an example, Roberts said Comcast's foray in the cellular telephone business in 1988 met with tremendous opposition from Wall Street and individual investors.

"When we went into cellular, our stock wasn't doing so hot," Roberts said. "The stock went down. [Some asked,] why are you getting into a new business? Then we went from 100,000 customers to almost a million in a couple of years and cellular took off.

"At the time we did it, one of our largest shareholders was ripping us publicly and in meetings. 'Why are you in this business? It's capital intensive. You don't need it. What's the synergy?' Six months later he came back and said, 'Thank God you didn't listen to me.' "

That appeared to be the Robertses' mentality in doing the AT&T deal. Less than a year after closing, Roberts and Comcast have evidence the skeptics were wrong.

Part of the reason for the success was that Comcast came into the acquisition knowing the task at hand and was more than prepared for it.

"This thing had been building for a long time," executive vice president of finance and administration Mike Tallent said, speaking of the seasoning Comcast added over the years as a result of acquisitions and talent infusions.

"This whole acquisition thing when we approached AT&T, this was really a 10-year process as it turned out. And each of us grew up across the board. There is an element of trust and respect when you work with a lot of different executives over time, you see how they act, you can calibrate their responses.

"When we decided how we wanted to approach this transaction, we had an army of people, certainly a critical mass of executives that were at the right time, the right ages, the right experience level to take something like this on," Tallent said. "I'll be the first to tell you that, five years ago, there's no way we could have done this type of transaction as efficiently as we've done it today."

'Moved quickly'

While the turnaround was dramatic, Comcast had about five months between when its deal to acquire AT&T Broadband was accepted and when the transaction finally closed on Nov. 18.

Comcast didn't squander any of that time.

"What we did right is that we moved very quickly," cable division president Steve Burke said in an interview. "On July 4 we named six divisional presidents. If we didn't have the divisions in place, if we couldn't rebrand the systems, there was no way to hit the ground running."

Burke was also aware of the troubles that could cripple the combined company if corporate cultures clashed.

"Another surprise was the degree to which we've been embraced by the people in AT&T," Burke said. "I was at Disney when [its 1996 acquisition of] ABC came together. There was a culture clash. With this merger, it was quite clear who was going to be in charge."

Burke said the Comcast mantra was simple: focus on the basic business.

"There was no way we were going to lose 480,000 customers," Burke said. "When we did the brand launches [in local markets], people came to us and said, 'Finally, someone who knows what they're doing.' "

No discounts

Burke added that Comcast won back those customers not by offering price discounts — an AT&T strategy that backfired badly — but by refocusing local systems on the video product and restructuring some of AT&T's Byzantine regional operations.

"We did it by taking care of the customer, by dish winbacks, by launching Hispanic channels in Miami [AT&T hadn't] and catching people stealing cable and making them pay," Burke said.

Burke and other senior Comcast managers say the integration was the product of a massive team effort.

Everyone from top management to finance to installers and CSRs played an important role in the turnaround.

"We looked at it to see what was the nature of AT&T," Tallent said. "When you look at it we were basically small corporate overhead, four operating divisions, regions and areas under that that were arrayed such that each executive had a span of control equal to the experience level and ability.

"AT&T was almost like a telephone model: a very centralized 4,000-people headquarters that devolved directly to operating units. There was no in-between; there was no other layer. It was really a clear picture of which way you wanted to do business — really heavy centralized, devolving directly to markets, or a span of control basis that you fit around your executives abilities. Since we understood this 8.5-million-sub model, for us it was a very straightforward decision."

Chicago story

In individual markets, the story wasn't always quite so simple. Take Chicago, for example.

Chicago had 86 different rate cards and 90 different channel lineups when Comcast took over, mainly because of must-carry agreements with local television stations, Tallent said.

Comcast's solution was to break the Chicago market into four quadrants – North, West, South and City of Chicago – headed by four different managers.

"Every market had different characteristics," Tallent said. "Even though they were very centralized, they were also very decentralized. The budgeting process was very different, all over the place."

At the franchise level, Comcast had another big task at hand. Executive vice president and general counsel Terry Bienstock said Comcast had to complete 3,000 franchise transfers as a result of the merger.

The goal, he said, was to complete the transfers in about six months. "That was triple the number of transfers anyone had ever done in history."

While Bienstock added that most of the transfers were relatively straightforward, a few posed problems.

Most of that came from friction between former AT&T executives and the local communities.

"I negotiated Jacksonville [Fla.]," Bienstock said. "AT&T said to them: 'If you don't let us off the hook on all of these non-compliance issues, we're not going to rebuild the system.' I went in and said to the mayor: 'We will do the rebuild no matter what you say. We're losing customers every day we're not rebuilding.'

"Once that was off the table, we could have a serious discussion."

Bienstock said that most of the franchise transfers have been completed, except for a few holdouts.

Finance management

Tallent said a secret to Comcast's success is the way it manages finances all the way down to the systems level.

Everyone at the company, from corporate executives to system general managers, is on the same page when it comes to financial performance and reporting.

"Each of our operating guys clearly understands the economic effects of what they do," Tallent said. "We spend a lot of time capturing these numbers and arraying them in such a way that in a very clear one-page thing, all of our guys understand that revenue minus expenses equals cash flow. Cash flow to us is not some theoretical construct that academics can argue about what it includes or what it doesn't include. It's a specific number on that page. Why that is so important is that it allows all of us to speak in a common language."

That, however, was not the case at AT&T Broadband, at least initially, Tallent said Comcast found.

Leading to the confusion was AT&T's practice of not allocating costs for certain services on a local level. One such omission was for telephone service – which helped Tallent realize why AT&T employees were pushing telephone service at the expense of basic video customers.

"We'd look and we'd say, Where are the costs for telephone?" Tallent said. "And they'd say they keep all of these things at corporate. Yet they're measured on their operating margin. If I were a general manager, I'd push telephone as much as I could because I'd get the revenue and no cost."

Improving customer service also became a top priority.

According to third-party research conducted for Comcast by iSKY Inc., 88 % of customers are pleased with the wide variety of programming Comcast offers and also give high marks to Comcast's customer-service representatives – 75% of customers have their problems resolved in the first call. The third-party researcher talks to about 20,000 Comcast customers per year.

No time to rest

Roberts says Comcast is not sitting on any laurels.

While the integration process has moved smoothly, there is still work to be done.

"There are one or two systems that have some issues," Roberts said. "They've lost some subscribers to satellite. They haven't reduced all the costs yet. We're by no means sitting here and saying this is it and we're perfect."

Vice president of human resources Nancy Reardon said that one of the top priorities of her office in the integration process was getting the word out to employees in a timely fashion.

"When I first got here and we were laying out the path for the year post-merger, I spent a lot of time thinking about what are employees usually worried about in a period of change like this?'" Reardon said. "One of the things very early on, well before we did the deal, was we made a list of areas that we wanted to focus on. Having a rich communications plan was something we wanted to focus on. By the closing date — Nov. 18 — we used all sorts of mechanisms to reach out to employees and make sure they were in the loop."

One of those mechanisms — which went live on Nov. 18 — was a Team Comcast internal Web site. When employees walked into their offices on that day an icon of the Team Comcast logo was on their computer screens.

That included a pop-up video welcome from Comcast.

"It gave us an opportunity to put [Roberts] Brian and Steve [Burke] out there as real people talking to the internal issues and trying to do it in a more personalized way," Reardon said. "We did the desk drop and all of that good stuff, but we wanted to show people a little bit more personality."

Prompt surgery

Reardon was also charged with laying off the equivalent of about 5,000 full-time employees, plus 2000 contractors. "What we tried to do was make many of the decisions happen quickly," Reardon said. "Steve [Burke] and Brian [Roberts] and our division presidents from day one, we wanted them to be absolutely upfront that it was going to happen, because it doesn't do any good to say we'll get to it over the next year. People know, in Denver we had duplicative staffs — you don't need two IT staffs, you don't need two CFOs. We tried to be honest and do it quickly."

Reardon said that another part of the integration was blending management expertise from the old Comcast and AT&T Broadband side.

"The deal itself gave us the opportunity to look across the enterprise where we had talent," Reardon said. "Steve [Burke] did a very good job helping to make decisions where we wanted to have a blend of expertise. "There were an incredible number of staffing decisions at the time of the deal.

"We also decided this year, why wait for another year to take a pass and look at how people were doing. At the mid-point, Steve [Burke] and I worked with each one of the division heads on a talent assessment."

Grooming leaders

Comcast also initiated an internal program — the Executive Leadership Forum — to allow existing employees to obtain the training and knowledge to move up the corporate ladder.

The 10-month program gives managers at smaller systems the know-how to move up to larger areas with bigger sub-counts.

For example, as part of the forum, managers at smaller systems sit in on budget reviews at larger properties and work on a project for the systems with a cross-functional team.

"The idea is that the best projects are ones where they not only do due diligence and understand what is the problem and come up with a hypothesis. If at all possible they are asked to do a pilot, test it and make sure it's viable and then come up with a strategy. If the recommendations that they develop are really outstanding, [issues are] what would make this portable to other systems, how they could come up with a way to share the knowledge."

The ELF program also has ties to Comcast University, a project that Burke helped start when he came on board about five years ago.

As for the future those groomed executives will grow into, Roberts said Comcast will continue its strategy of focusing on its existing customer base, providing the latest services and technologies and keeping an opportunistic eye out for acquisitions.