Western Union sent its last telegram in January 2006. News stories reporting the event attributed the telegram’s demise to developments since the 1980s, including deregulated long-distance telephone service, fax machines, and email, media that retain the rapidity or permanence of the telegraph message. New York Times commentator Verlyn Klinkenborg, noting that he had received exactly one telegram in his lifetime, mourned its passing as “like knowing that the last martini has been drunk or the last dinner jacket worn.” Robert Roy Britt, “Era Ends: Western Union Stops Sending Telegrams,” Feb. 1, 2006, Yahoo News, consulted on Feb. 1, 2006; Verlyn Klinkenborg, “The Telegram,” New York Times, Feb. 8, 2006. Klinkenborg’s remarks capture the popular conception of the end of telegraphy, that it was a quintessential 19th and 20th century medium overtaken by newer communications technologies in the past generation. True enough. Yet the story of the final telegram is also a story of the decline and fall of Western Union, a century-long story of shortsightedness, mismanagement, short-lived turnarounds and subsequent reversals, and, finally, dismemberment at the hands of 1980s junk-bond dealers. It is also the story of talented managers, who, from the 1940s onward, labored valiantly to save and rejuvenate the company. The task was ultimately impossible. Robert Flanagan, the company’s last significant CEO, remarked in 1985 that trying to save Western Union was like “turning an elephant around in a bathtub without spilling any water.” Flanagan neatly summed up a problem often faced by business leaders but rarely noted in management literature. Most of the literature on corporate failure focuses on sins of commission or omission, blunders that executives made or shifts in technology or consumer preference that they failed to foresee. See for example: Robert Sobel, When Giants Stumble: Classic Business Blunders and How To Avoid Them (Paramus, N.J.: Prentice Hall Press, 1999); Paul Solman and Thomas Friedman, Life and Death on the Corporate Battlefield: How Companies Win, Lose, Survive (New York: Simon and Schuster, 1982); Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997); Kevin Kennedy and Mary Moore, Going the Distance: Why Some Companies Dominate and Others Fail (New York: Prentice Hall, 2003); and Kenneth Labich and Patty de Losa, "Why Companies Fail," Fortune 130, Nov. 14, 1994, 22-32. Yet Western Union’s postwar managers confronted an intractable problem: in the long run the company might simply have been unsalvageable, yet they had to try. While this paper focuses on the efforts of two presidents, Walter Marshall and Russell McFall, to modernize and save Western Union from 1948 to 1979, a short summary of the company’s long decline will explain the challenges Marshall and McFall faced. Western Union’s downfall really began in 1878, when its president William Orton, a capable and far-sighted leader, died. Orton and his predecessors Hiram Sibley and Jeptha Wade had welded together a collection of regional telegraph lines into the country’s first industrial monopoly. A succession of timid, feckless, or simply incompetent managers occupied the president’s chair from Orton’s death until World War 2. While Sibley, Wade, and Orton embraced technological innovation and expansion into new markets, their successors narrowly conceived their mission as merely maintaining Western Union’s dominance in telegraphy and providing a steady modest dividend to shareholders. Between 1878 and 1910, telegraph technology stagnated and the company even retreated from its strong position in the telephone market, leaving it to a better-managed and more innovative Bell company. Western Union’s managers saw the telegraph as strictly a business necessity, and made no effort to create new services or entice new customers. By 1909 AT&T dwarfed Western Union, and AT&T president Theodore Vail acquired control of the telegraph company to fulfill his vision of an integrated telecommunications company. AT&T divested itself in 1913 under threat of antitrust prosecution, but in the short time it controlled Western Union, it modernized its plant, accounting procedures, employee relations, and rate structure. AT&T’s short-lived control of Western Union laid the foundation for about 15 years of prosperity until the start of the Great Depression. However, Western Union’s managers failed to prepare for the future by adopting a research and development program or a coherent marketing strategy. Revenues dropped sharply during the Great Depression, but competition from AT&T and the federally subsidized airmail service posed more serious long-term threats. In 1931 the telephone company unveiled a teletypewriter service that allowed subscribers to contact other subscribers directly and hold a two-way teleprinter conversation. Western Union had no comparable service to offer until several years later, and continued to rely on more expensive and labor-intensive telegrams delivered by messenger. Western Union also lagged in adopting new transmission methods such as carrier-current circuits. Despite a wartime boost in telegraph traffic, Western Union’s share of the intercity rapid communications market continued to drop. For a good overview of Western Union’s problems and declining market share, see Hyman Howard Goldin, "The Domestic Telegraph Industry and the Public Interest: A Study in Public Utility Regulation." Ph.D. dissertation, Economics, Harvard University,1950. In his introduction (pp. 1-2) Goldin gave a succinct statement of the problems confronting Western Union: "The underlying ills of this industry are not of recent origin. They have been germinating for decades. They arise primarily from technological change and a shift in consumer preference" to telephone and other services. "Competition from these services were bound to make sharp inroads in the telegraph market, even had the management of the telegraph carriers been distinguished for their administrative skill and for the adoption of bold, far-sighted policies in respect to technology, rates, service, labor, and public relations. The lack of such leadership has tended to accentuate telegraph's waning popularity in this country." For Western Union’s failure to develop an internal R&D program, see reports from Engineering Vice President Ferdinand d’Humy to President R. B. White; Aug. 12, 1935; Dec. 16, 1937; and April 15, 1938; all in Western Union Telegraph Company Collection, National Museum of American History Archives Center, Smithsonian Institution, Washington, D.C. (hereafter WUTC). Walter P. Marshall, an old telegraph hand with 27 years of experience, assumed control of the company in December 1948. Marshall had intimate knowledge of Western Union’s problems, and he correctly regarded declining market share and high labor costs as the company’s major difficulties. Nearly all of Western Union’s revenues came from the stagnant message telegram business, and wages consumed 70% of the company’s income. Marshall embarked on a three-fold strategy to increase the company’s productivity and market share. First, he sought to modify the regulatory environment to Western Union’s advantage. He continually won rate increases from the Federal Communications Commission (FCC) to offset wage increases mandated by collective bargaining agreements. More importantly, he frequently protested to the FCC that Bell’s rate structure subsidized its telegraph services through its vastly more profitable telephone business. Marshall’s protests led to an extensive FCC study of AT&T’s rate structure in 1963 and 1964, which not only confirmed his suspicions but also helped to lay the foundation for later telecommunications deregulation. Finally, he continually lobbied lawmakers and regulators to draw a sharp regulatory line between voice and record communications, and to grant Western Union the status of the nation’s “chosen instrument” in record communications, similar to Bell’s status in voice communications. He was only partially successful at this; the FCC did not force AT&T to sell its teletypewriter service to Western Union until the late 1960s. “Western Union Is Still in Trouble,” Business Week, Nov. 19, 1949; Harry M. Trebing, “Plight of the Telegraph Service,” MSU Business Topics, Summer 1967, 43-54. On the Seven-Way Cost Study see “Domestic Telegraph Investigation. Digest of F.C.C. Staff Report,” n.d., AT&T Archives, Warren, N.J., Box Loc. 608 04 02, folder 12. The second element of Marshall’s strategy was to modernize Western Union’s outdated plant. He embarked on an ambitious $80 million dollar program to build a national microwave carrier-circuit network to replace its antiquated pole lines. He also two developed record communications methods that did not depend on Western Union labor, a teletypewriter network commonly known as Telex and a facsimile network called DeskFax. By 1950 the company had installed over 6,000 DeskFaxes on subscribers’ desks, and a total of 36,000 by 1959. Both Telex and DeskFaxes allowed subscribers to send messages directly to other subscribers without using Western Union labor. These moves allowed Marshall to trim the company’s workforce from 66,000 to 43,000 by 1950, at an annual savings of $17 million. “Clear All Wires,” Time, May 22, 1950, 98-100. In 1957, in a pioneering product-placement marketing campaign, Western Union paid NBC to install a DeskFax on Jack Paar’s desk, making it an integral part of in The Tonight Show. George P. Oslin, One Man’s Century: From the Deep South to the Top of the Big Apple (Macon, Ga.: Mercer University Press, 1998), p. 89. Finally, Marshall sought to reduce the company’s dependence on the declining message telegram market by tapping new markets related to its core competencies but not subject to FCC regulation. Turnkey communications systems for government and industry held the most promise. In 1950 Western Union set up a teleprinter network connecting nearly 200 major banks, and a facsimile system for the U.S. Air Force to connect over 200 bases. The specified rate of return on the Air Force contract was 7.5% a year, above the return the company could expect from the regulated telegraph service. He hoped to generate $500 million in revenue from these private leased networks by 1969. “Private-Wire Network Connects 188 U.S. Banks,” Business Week, Sept. 16, 1950, 106. "Western Union, by Grace of FCC and A.T.&T.," Fortune, March 1959, 114-119, 217. By 1960 Marshall had turned Western Union from a company on the verge of bankruptcy and obsolescence into a major player in the telecommunications market. About 2000 companies were leasing turnkey communications networks from Western Union, revenues and earnings were at all-time highs, and the company’s debt was retired or advantageously refinanced. With its financial house in order and its modernization complete, Marshall planned to spend another $350 million by 1965 in new plant and equipment to transmit both television programs and computer data communications. By the early 1960s, Marshall was betting Western Union’s future on data transmission as the growth market of the next decade. In sum, Marshall succeeded in transforming Western Union into a modern telecommunications provider through massive yet responsible spending. “Electronics Puts Young Blood in Old Company,” Business Week, Aug. 27, 1960, 87-92. In 1965 Marshall recruited his replacement, Russell McFall, a 43-year-old manager from the glamor industries of aerospace and electronics. McFall shared and amplified Marshall’s vision for Western Union’s future. He planned to remake Western Union into "a national information utility" in which customers would lease time on Western Union mainframe computers, with the terminals and transmission lines all owned by the firm. He also wanted to establish a comprehensive satellite communications system to transmit television programming and other broadband applications. As McFall explained shortly after assuming the presidency: “We are in the communications service business, but this entails a new concept of communications. We have to broaden communications to include the processing of information as well as the handling of it.” Yet he admitted that a very real problem was “how to build these systems without spending so much money that we kill ourselves in the process." “Western Union Hums--With Data,” Business Week, Feb. 20, 1965, 150-156; "Uneven Match?" Forbes, March 15, 1968, 81-82; “FCC Studies Western Union Bids for Satellite Network,” Aviation Week and Space Technology, Nov. 16, 1966, 33. Thus, the course that McFall chose for Western Union posed a dilemma. In order to grow as a modern telecommunications company, Western Union needed to compete in the data-processing market. Doing so meant taking on much larger corporations, especially IBM and AT&T, a task requiring a great deal of capital. Since the company relied on low-margin message telegrams for the majority of its income, it could not finance such large spending through internally-generated capital. Ultimately, Western Union had to spend more money than it could afford. While McFall’s ventures into data processing and satellites looked flashy, customers continually complained of poor service in its core businesses. Marshall had maintained high standards of quality and timeliness for handling telegrams, if only to placate regulators and maintain the integrity of the Western Union brand, but McFall sought to kill off this low-margin business by continually raising rates and lengthening transmission times. By the late 1960s a domestic telegram cost more than a 3-minute telephone call to Europe. In 1968 a frustrated FCC Commissioner, Nicholas Johnson, remarked that “the telegram, like the passenger ship and the carrier pigeon, has outlived its economic usefulness.  But, if that be the case, a firing squad might be more humane than long lingering starvation." "Western Union Finds a Connection," Business Week, May 25, 1968, 138-140.  Despite its ambitious ventures into computers and satellites, Western Union remained a low-growth company. The story of Western Union’s imminent turn-around had been a staple of the business press since the late 1940s, but the company’s low growth and huge debt load made a lasting recovery difficult to achieve. Yet McFall continued spending. Between 1965 and 1971, the company doubled its capital investment, but its 4.4% return on equity was the lowest of all the country’s major utilities. In 1972 the company’s debt for capital investments amounted to just under $500 million, about equal to its equity, and the company had another $365 million in unfunded pension liabilities. By 1974 McFall had resorted to creative accounting procedures to hide the company’s tightening financial straitjacket. That year Western Union reported a net profit to its shareholders, but its IRS tax return showed a net loss. Financial analysts discovered that the company was, in effect, using borrowed money to pay shareholder dividends, and that expenditures consistently outpaced cash flow. Because analysts questioned the quality of the company’s earnings, it was unable to raise money by issuing more stock or selling bonds except at ruinous interest. Western Union relied on bank loans to finance its ongoing capital expansion programs. In a remark reminiscent of the Enron meltdown three decades later, one frustrated analyst complained, "You need a CPA, an attorney, a semanticist, and a metaphysician to understand what the footnotes in Western Union's reports mean." "Lazarus," Forbes, Oct. 1, 1972, 26-27; "Western Union in a Tightening Squeeze," Business Week, June 8, 1974, 68-75.  When McFall retired in 1979, he left a mixed legacy. By all accounts, he had rescued Western Union from technological obsolescence, but he had spent $2.5 billion to do it. The company’s debt exceeded its equity. His successor Robert Flanagan sought to reduce expenditures by reorienting the company from hardware to services. He also reined in expenses by cutting staff, selling off unprofitable operations, and relying only on internally generated capital to finance development of three new and quite promising areas, AirFone telephones on board passenger airliners, cellular telephones, and email. "This Time, Maybe?" Forbes, March 3, 1980, 82.  With luck Flanagan might have succeeded in saving Western Union with a financially sound program of investment in these areas, but the financial situation bequeathed by McFall left no margin for the unexpected. In early 1984 Western Union lost its sixth communications satellite shortly after launch. Although the $75 million satellite was insured for $100 million, it would have generated up to $500 million in revenue over its service life. At the end of the year, a consortium of eight banks refused to extend Western Union’s credit, leaving it on the verge of bankruptcy. Two years later Western Union fell into the clutches of junk-bond dealer Drexel Burnham Lambert. One financial writer called the company “a huge, docile cash cow [that] had been dropped in [Drexel’s] lap, ready to be carved up, hauled to market and sold in pieces for millions.” Indeed, over the next few years, Western Union’s management sold off all of its capital assets, its satellite network to Hughes, and its Telex network to AT&T. By 1990 all that remained of Western Union was its hugely profitable money transfer business, which in 1994 got sold along with the Western Union brand to First Data Corp. "Losing a Satellite Will Cost Western Union Plenty," Business Week, Feb. 20, 1984; Maggie Mahar, “Is Someone Sending a Message?” Barron’s, Dec. 22, 1986, 13; “Drexel’s Heavy Hand,” Newsweek, Nov. 23, 1987, 53-55. As Western Union’s history suggests, corporate failures become apparent and acute during crises, but they often have deep roots. Western Union failed in the 1980s because it could not resolve the dilemma of technological obsolescence on the one hand or overspending to modernize on the other. Yet this dilemma had persisted since World War 2, and its roots reached back to 1880. Adopting a longer historical perspective on Western Union’s failure offers three lessons for managers and historians. Most importantly, a company that succeeds through technological innovation and leadership must never lose that capacity. In the 1870s Western Union developed several new technologies that transformed the telegraph industry, and the company stood an excellent chance of driving the fledgling Bell company out of telephony. Afterward, however, Western Union voluntarily exited the telephone market and made no effort to modernize its telegraph network. AT&T was able to obtain control of Western Union in 1909 because the telegraph company had stagnated for thirty years. This technological stagnation persisted for another generation after AT&T relinquished control. While companies like AT&T, GE, Westinghouse, RCA and many others developed industrial research and development capabilities in the first decades of the 20th century, Western Union did not until after World War 2. Thus when Western Union undertook a crash program to modernize after the war, it had no internally developed base from which to start. Such a base would have smoothed Western Union’s transition from a telegram carrier to a modern telecommunications company. Instead, this transition was much more halting and expensive than it needed to be. Despite ambitious innovation and marketing programs, when Marshall retired in 1965 the company still depended on the declining telegram market for half its revenue. His successor Russell McFall sought to reduce this dependence through a radical reorientation away from Western Union’s core competencies and into new fields like computers and satellites. McFall allowed the company’s telegram service and rates to worsen, pushing the company further from its center of gravity and reducing the appeal of its brand. Under McFall Western Union’s debt ballooned until he ultimately bankrupted the company. Thus a second lesson of Western Union’s collapse is that such a radical transformation of a firm must be undertaken in a financially responsible way through a mix of internally generated and externally raised capital. A final lesson is that technologies often outlive their corporate shells. For over a century the telegram was synonymous with Western Union. While the telegraph industry may be dead, the market it served, record communications, persists in the form of fax and email.  Turning an Elephant around in a Bathtub": Managing Western Union’s Post-World-War-2 Decline David Hochfelder State University of New York at Albany BHC 2007, Session 4, Sat., 10:30-noon, PBL 05 1 DRAFT--NOT FOR ATTRIBUTION DO NOT QUOTE OR CITE WITHOUT AUTHOR’S PERMISSION