U S West-Frontier Deal Warps Into Qwest's Impossible Dream
By Jim Seymour
Special to TheStreet.com
6/22/99 5:33 PM ET
If CNBC has Stock-Picking Friday, and Rush Limbaugh has Open-Line Friday, can you and I do Dealmaking Tuesday here for a minute?
The market is obviously still unhappy with the offer by Qwest (QWST:Nasdaq), which I am long, to acquire U S West (USW:NYSE) and Frontier (FRO:NYSE), but the Denver whirlwind is doing all it can -- short of gracefully backing away from the offer -- to win back investors' confidence. Or, to put it less generously, to distract us from the bad deal.
Monday, Qwest announced a joint venture with KPMG to build a joint-venture application-service provider, or ASP, business. Good timing: ASPs, which allow corporations to use big software apps on an as-needed basis, are just about to explode. (Keep reading for more here on ASPs later this week.)
The new company, Qwest Cyber.Solutions, sounds like a plausible and potentially very profitable joint venture. KPMG has already built credibility in the corporate outsourcing/corporate services market, and in fact will be transferring about 450 applications specialists from its current consulting practice to the new company. Qwest, the 51%/49% majority owner of the new enterprise, is throwing in some existing contracts with independent software vendors and corporate clients, and preferred access to its network of Cybercenters around the country -- plus John Charters, Qwest vice president for business development, as CEO. Phil Garland, KPMG's head of applications outsourcing, will be COO.
I wish the timing of this announcement hadn't followed so sharply on the heels of the market's negative reaction to the U S West-Frontier offer. It makes Qwest look like a company in trouble, trying to move the walnut shells around faster than we can follow.
That said, while I still think Qwest shareholders are best served by a continuing focus on laying cable and leasing bandwidth, it's easy to understand Qwest CEO Joe Nacchio's desire to get into businesses with more immediate revenue opportunities, such as its growing long-distance-provider business. And I'm an unabashed bull on the prospects for the ASP business over the next decade.
So maybe this really is the right deal at the right time, not just sleight of hand. Maybe.
Back on the main stage, Qwest's pursuit of both U S West and Frontier -- both of which have dusted off the offers -- seems lost in the woods. Even if the proposed acquisition targets were ready to join Qwest, it's clear the deals could not be concluded with Qwest's stock in the Dumpster. Yet the only thing likely to pump Qwest back up into at least the mid-40s, where it had languished for a while before the offers were made, is ... you guessed it ... Qwest's definitive withdrawal of the acquisition offers.
As I've written here before, acquiring Frontier wouldn't be all that bad an idea for Qwest, though it's hardly a necessary, nor even a very good deal. But break-up fees owed by both U S West and Frontier to Qwest's opponent in this battle, Global Crossing (GBLX:Nasdaq), in the unlikely event that they were to choose Qwest -- plus the lack of collars in both deals -- continue to make this the Deal From Hell for all concerned.
Except, perhaps, for Global Crossing, in which holders would be well served by a graceful retreat by management from its offer. But that won't happen unless and until Global Crossing sees U S West or Frontier throw in with Qwest, because Global Crossing would be foolish to walk away from those potential break-up bounties.
See what I mean about the Deal From Hell nature of this one?
I think Qwest management will come to its senses, realize that it's put itself in a no-win game and back away. No doubt that action -- which could come as soon as the end of this week -- will be accompanied by a lot of huffing and puffing by Qwest managers over their noble motives in folding their tent.
Heck, there's nothing noble here: They lost. But Joe, there's nothing ignoble about admitting defeat and jumping back on the fast-growth track. The Street would reward a clean break with a nice bump in Qwest shares, and Nacchio & Co. would regain some of the street credibility as el primo telco strategists they threw away by this misguided offer.
What should Qwest shareholders do? For myself, I'm sitting this one out. The damage has been done to the share price, and there's nothing to be gained at this point by bailing.
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Yep. JJC is a trader, and I'm inclined to think that he sold close to a bottom. Sizeable support at 30 and 25.
Cheers,
D
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