Posted: 09/1999
Qwest, US WEST Agree To Merge in $34.7 Billion
Deal
By Liz Montalbano and Ken Branson
In what comes as little surprise and ends more than a monthlong standoff between two of telecom's most significant players--Denver-based Qwest Communications International Inc. and Hamilton, Bermuda-based Global Crossing Ltd.--Qwest and Denver-based US WEST Inc. have agreed to merge.
The No. 4 long distance carrier, in turn, withdrew its offer for Rochester, N.Y.-based Frontier Corp., which is expected to steam ahead with its planned $10.9 billion merger with Global Crossing.
The agreement between Qwest and US WEST is a stock swap worth $34.7 billion, which means Qwest is paying about $69 a share for the regional Bell operating company (RBOC). The combined company will retain Qwest's name.
Joseph P. Nacchio, Qwest's chairman and CEO--and who New York-based Bank of America Securities senior telecom analyst Mike Renegar says has been at the helm of the deal all along--will keep his hands on the tiller as the new company's chairman and CEO. US WEST Chairman, President and CEO Solomon D. Trujillo, meanwhile, will become chairman of Qwest and president of the new company's broadband local and wireless business.
"This seems to be the best possible outcome for all the parties," says Jeffrey Kagan, an Atlanta-based telecom industry analyst, of the merger.
But while Jonathan B. Haller, director, Internet and network services analysis for Sterling, Va.-based Current Analysis Inc., agrees Global Crossing, Frontier and US WEST are winners in this deal, he begs to differ about Qwest.
He feels Global Crossing scores by winning itself a national network in the United States, "the most important telecom market in the world," and that Frontier will benefit from Global Crossing's worldwide undersea and terrestrial networks.
As for US WEST, the smallest Baby Bell should be grateful someone came along and beefed it up, especially a company such as Qwest, which is, as Haller says, "the darling of Wall Street, with its broadband national network."
But Haller thinks Qwest may be like a child on Halloween--after it goes home and enjoys its spoils, it may end up with a big, fat bellyache.
"I never have liked the Qwest acquisition of US WEST," he says decisively. "Qwest doesn't come out looking good, because they've got this high-powered, fast-moving entrepreneurial culture that's driving as fast as lightning, and now they're going to be saddled with a company that has the culture, the legacy problems, the legacy network [and] the rural territories."
Aside from the difficulties in pairing contradictory business philosophies, Qwest more than likely will have to tell its long distance customers in US WEST territory to find another provider. On the ladder of Section 271 compliance, US WEST barely has its foot on the bottom rung, and the RBOC won't win approval to offer in-region interLATA (local access and transport area) service until its markets meet the 14-point competitive checklist mandated by the Federal Communications Commission (FCC). Since that agency already nixed a proposed Qwest/US WEST joint venture that allowed the incumbent to market long distance in-region last year, the combined company will have a better chance at selling an iMac to Bill Gates than it would at offering long distance in US WEST territory.
Of course, Nacchio has said he is willing to relinquish that service in US WEST territory--for now, anyway. Qwest hopes US WEST will win approval by January 2002, but if it does not, Nacchio is willing to spin off or sell its interLATA operations in states where US WEST cannot offer long distance by next summer.
This apparent nonchalance over losing long distance service supports the general consensus that Qwest's play for the RBOC was never about increasing its long distance market--it was about cold, hard cash.
"This is mostly a financial deal," Renegar says. "Qwest needs cash flow. They have a network, and they need traffic on it."
Haller, too, says the more than $4 billion in revenue a year US WEST will earn Qwest was a big catalyst for the merger. He foresees Qwest using that money to fund its network buildout and Internet and applications services.
But money isn't everything, and Haller still thinks Qwest is getting a little more than it bargained for by merging with Ma Bell's problem child. In his Current Analysis report on the merger, Haller writes, "Our disdain for an acquisition of US WEST is well-documented, and the final resolution doesn't serve to alleviate our concerns. The RBOC has a vulnerable local position, no wireless market share, no international holdings, a small (but growing) data services division, a reputation for poor customer service, and a monopolistic and bureaucratic culture.
"Qwest's acquisition represents an astonishing case of a 'next-generation' carrier morphing into a 'legacy' carrier," he says.
