Qwest CEO Nacchio Resigns Post
At Board Request Amid Troubles
By REBECCA BLUMENSTEIN, SHAWN YOUNG and DEBORAH SOLOMON
Staff Reporters of THE WALL STREET JOURNAL
Qwest Communications International Inc. Chief Executive Joseph P. Nacchio has resigned at the request of the board, which had become increasingly frustrated with a slew of financial and regulatory troubles besetting the telecommunications company, according to people familiar with the situation.
At a board meeting Sunday night, Qwest's directors named as the company's new CEO and chairman Richard Notebaert, chief executive of Tellabs Inc. who left his former post as chief executive of Ameritech after that Midwest regional Bell was acquired by SBC Communications Inc. in 1999. Mr. Notebaert, 54 years old, would bring to Qwest his deep experience with local telephone companies in the Midwest, a predictable and relatively stable sector that investors currently hold in favor. The management shakeup is expected to be announced as early as Monday, these people said.
Mr. Nacchio, reached at his home in New Jersey Sunday night, declined to comment. He also resigned as a Qwest director, although he is expected to remain as a consultant for an undetermined amount of time.
Mr. Notebaert couldn't be reached for comment.
Mr. Nacchio's departure from the giant company he helped to nurture almost from its founding in 1996 comes as the telecommunications industry faces a deepening crisis. Massive construction of new fiber-optic capacity, for which sufficient demand hasn't materialized, has left companies swimming in debt. Moreover, Qwest, with $26.6 billion in debt, is now being investigated by the Securities and Exchange Commission for its accounting practices. The Denver company has had steep declines in both its local and long-distance businesses and faces a crisis of investor confidence in the company and its leadership. Qwest's stock has fallen more than 92% since its high of $57.88 in July 2000.
Analysts and investors have speculated for months that the charismatic Mr. Nacchio, 52, might succumb to Qwest's mounting problems. But the executive appeared to have the support of the board, which granted him a new contract last October. That contract, which ran through 2005, increased Mr. Nacchio's salary to $1.5 million per year from $1.2 million, and raised his target bonus to $3.75 million from $2.4 million.
Mr. Nacchio was applauded in 2000 for combining the Qwest fiber-optic business with the more staid operations of U S West Inc., the regional Bell that serves 14 Western and Mountain states. But rather than accelerating growth at U S West, the combination has dragged the local phone carrier down under the weight of the telecom bust.
In recent months, according to people familiar with the matter, Mr. Nacchio has had less control of Qwest while its founder and co-chairman, Phil Anschutz, and Craig D. Slater, a board member and associate of Mr. Anschutz, have been more or less calling the shots. Increasingly, Mr. Nacchio has come under criticism by investors and analysts for the way he has managed Qwest and for cashing out more than $300 million of his personal Qwest holdings even as the company struggled and investors saw the value of their holdings plummet.
The board's decision to oust Mr. Nacchio appeared to be the cumulative result of the numerous problems facing the company and not the result of any particular or any new, negative development, said people familiar with the situation. Mr. Nacchio was informed of the board's decision Friday night.
Vulnerable Giants
Qwest, with about $20 billion in annual revenue, is among the giants of the telecommunications companies that are most vulnerable to the industry's woes. These companies soared the highest in the late 1990s by boasting they were transforming the stodgy world of communications with double-digit growth figures, huge fiber optic networks and the Internet. Global Crossing Ltd. filed for Chapter 11 bankruptcy protection in January and dozens of others have declared bankruptcy. In late April, Bernard J. Ebbers, the founder and chief executive of WorldCom Inc., was forced out.
Qwest's credit rating was recently cut to "junk" status by ratings agencies and Qwest has spent the past year frantically trying to cut costs by slashing more than 17,000 jobs, selling assets and continually reducing capital spending. The company is now forced to sell one of its biggest cash-generating units, its profitable telephone directories business, in a bid to pay down debt. Its stock, meanwhile, has hit continual 52-week lows and is now trading at around $4 per share.
Mr. Nacchio has been criticized for cashing out more than $300 million since taking the helm of Qwest by exercising stock options and selling shares in Qwest. Last year, he received a $1.5 million bonus on top of $1.2 million in salary and stock options that could be worth $194 million if Qwest's stock price increases 10% during the next decade. He also received a $24 million payout tied to growth shares he got as part of a long-term incentive package prior to the public offering of Qwest. Mr. Nacchio previously has said his stock sales were part of a board-approved plan to diversify his holdings.
Qwest enjoyed a lofty stock price for several years in large part because of Mr. Nacchio. The tough-talking, Brooklyn-born executive expanded the upstart's revenue from about $670,000 in 1997 and vaulted Qwest from an unknown carrier to the big time with his splashy 2000 acquisition of U S West.
Qwest's revenue has soared since Mr. Nacchio took the helm, but the company is the subject of a Securities and Exchange Commission investigation into how it booked revenue for 2000 and 2001. The company was one of the most aggressive users of "swap" transactions -- selling long-term capacity on its fiber network to another carrier, buying the same amount of fiber on another carrier's network and then booking the contract as revenue. The practice boosted Qwest's revenue by more than $1 billion in 2001, according to filings with the SEC. Mr. Nacchio in the past defended the capacity sales as "smart business moves."
Growth Stagnates
With the swaps gone, Qwest's growth has stagnated. The U S West portion of the business now accounts for about 80% of revenue and 90% of earnings before interest, taxes, depreciation and amortization. But even that local phone business isn't growing as much as it was before, when the economy was booming and customers were snapping up multiple phone lines at a rapid clip.
Qwest has also come under scrutiny in several states, where regulators are investigating whether the company struck secret deals with competitors who agreed not to oppose its efforts to expand its long-distance business.
Qwest has said the provisions for companies to promise not to oppose Qwest were not unusual, and that Qwest didn't need to disclose its agreements to regulators because they were confidential resolutions of disputes.
Qwest hopes that Mr. Notebaert, who has spent 30 years at local telephone companies in the Midwest, will be able to renew investors' confidence. His low-key management style contrasts with Mr. Nacchio's outspoken manner.
Write to Rebecca Blumenstein at rebecca.blumenstein@wsj.com, Shawn Young at shawn.young@wsj.com and Deborah Solomon at deborah.solomon@wsj.com
Updated June 17, 2002
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