Information Technology: Telecom
Qwest-U S West: They're Merging, but Is It Worth It?
Their marriage could be bait for the big boys
Joseph P. Nacchio has been in overdrive since mid-June, when the Qwest Communications CEO launched twin hostile bids for U S West and Frontier Corp. "It's been a bitch," he says, relating a relentless schedule of cross-country dashes and pizza-stained strategy sessions in Qwest's downtown Denver offices. But on July 18, Nacchio won the prize: a $36.5 billion dollar merger with crosstown Baby Bell U S West. Qwest backed out on Frontier, the Rochester (N.Y.)-based regional phone company, which will merge, as planned, with Global Crossing of Bermuda.
For Nacchio, and investors who have pushed down Qwest's share price 27%, to 32 5/8, the question remains: Is the prize worth it? The hard-charging 50-year-old executive faces a huge challenge merging the two company's cultures--one a feisty startup, the other a monopoly. And bold plans to realize $12 billion from increased revenues plus lowered operating and capital expenditures between 2000 and 2005 may be hard to come by. Nacchio has to satisfy widely divergent shareholder bases, U S West's nervous labor unions, and state and federal officials. "This will be a very turbulent period for Qwest," says David Barden, an analyst at J.P. Morgan in New York.
Nacchio doesn't disagree. But he sees potential for Qwest's stock to appreciate because its beefier scale will allow it to remain acquisitive in a rapidly consolidating industry. "This is about the industry structure reforming itself in the next 5 to 7 years," he says. "We needed to make some bold moves."
How bold? For one, Nacchio is gutting U S West's dividend from an annual $2.14 to a nickel. This will free up $5.5 billion in cash between 2000 and 2005 to fund Nacchio's plans to acquire a bigger presence in wireless and broaden Qwest's business in Europe and Asia. Nacchio will use that money to accelerate the building of high-speed digital subscriber line (DSL) links in major cities served by rivals SBC and Bell Atlantic. Then Qwest could offer end-to-end broadband connections and applications such as rentable software and Web hosting.
Still, Nacchio risks losing focus. A major problem: merging 9,000 employees at Qwest with 54,000 workers accustomed to the slower pace at U S West. Nacchio says that job cuts will number only "a couple hundred over time." But analysts expect more will have to go.TOO SMALL? What's more, the big synergy between the two companies--the ability to pump voice and data traffic from U S West's territory onto Qwest's high-speed national fiber-optic backbone--can't happen until the FCC rules the Baby Bell has opened its lines to more competition. That is likely several years away, says U S West chief Solomon D. Trujillo, who joins Nacchio and Qwest's founder and top shareholder Philip F. Anschutz in a newly created office of the chairman. Meanwhile, Qwest will have to divest more than $200 million in long-distance business it now does in the region.
Indeed, Nacchio may not get the chance to feed his voracious appetite. With a market capitalization of $53 billion, Qwest will be only the sixth-largest U.S. telco--just a quarter the size of AT&T. That means Qwest itself could merge yet again. "Qwest will end up inside a multinational," says Nacchio. For Anschutz, who owns 287 million shares, and Nacchio, with options on 9.3 million, that may be the real prize.By Steven V. Brull in Denver