Qwest future bright without U S West
Carrier still poised to prosper even if it loses bidding war
By Jeffry Bartash, CBS MarketWatch
Last Update: 6:15 PM ET Jun 24, 1999 NewsWatch
WASHINGTON (CBS.MW) -- Even if Qwest Communications fails to wrest Frontier Corp. and U S West away from Global Crossing, the so-called "next-generation" phone carrier is almost assured a luminous future.
To be sure, Qwest (QWST: news, msgs) is intent on winning the bidding war. Its latest unsolicited offers surpass those of Global Crossing and guarantee shareholders of the target companies protection against a further decline in its stock. See story.
Nevertheless, there's still resistance among executives and workers at U S West -- the key target in the brouhaha -- never mind among Qwest shareholders, who've expressed their displeasure by driving the stock down 25 percent since the hostile bids were announced.
While the addition of millions of U S West customers and billions in extra revenue would go a long way toward funding Qwest's global expansion and propel the company into the ranks of premier telecommunications carriers, the company has been doing just fine, thank you.
Already, it's constructed an 18,000 mile-plus high-speed digital network in the United States -- one of the first of its kind -- and is gearing up for rapid expansion overseas. It's got gobs of bandwidth, great management, a growing reputation and, until its bid for U S West, was the darling of Wall Street investors. That makes the company supremely suited to become a leading carrier of information in the burgeoning Internet Age.
"It's a great young company that's got lots of room to grow," said Brian Cotton, director of telecommunications research at market researcher Frost & Sullivan.
'WorldCom light'
A company that did not exist just three years ago, Qwest has quickly emerged as the fourth largest U.S. long-distance carrier, a lightening-fast advance that's prompted some industry observers to dub it "WorldCom Light."
Like its bigger rival, Qwest grew by being quick, aggressive and acquisitive -- its purchase last year of the larger LCI International thrust into the national limelight. It's no surprise the carrier is trying to pull off a similar move with its bid for U S West, which has five times the revenue at more than $10 billion annually.
Yet many investors are fearful of the harm such a deal will wreak on earnings. While Qwest is projected to boost earnings about 49 percent annually over the next five years, U S West (USW: news, msgs) is seen growing at a meager yearly rate of 6.5 percent. If the two companies were to combine, Qwest's growth rate could be sliced in half.
Moreover, many investors aren't crazy about aligning themselves with a regulated old-line phone carrier, especially one with relatively more rural customers than the other Bells and the worst reputation in the industry. According to J.D. Powers & Associates, a market research firm, U S West ranks last in customer satisfaction among the big local phone providers.
Christopher Mines, an analyst at market researcher Forrester Research, blisters Qwest's attempt to lasso U S West and Frontier, calling a report last week: "Qwest/US West: Dumb And Dumber."
"This moves the company's center of gravity from high-growth Internet services to regulated local phone service," Mines wrote. "Qwest ends up in the same fix as other big telecom companies: It will be struggling to integrate disparate back office systems, workforces, and customer bases."
While financial analysts have generally more receptive to a Qwest-U S West linkup, there's also some skepticism among their ranks.
Drake Johnstone of Davenport & Co. noted that Qwest is targeting lucrative business customers in big metropolitan markets, while "U S West is focused on rural markets and does not have a significant base of business customers or substantial international traffic."
"I am puzzled by their pursuit of Frontier and U S West," he said. "I don't think it makes strategic sense."
Full speed ahead
Obviously, Qwest does not agree with its critics or many of its institutional investors. Nacchio, a former AT&T executive, is convinced his company needs to basically buy the relationships that U S West has with longtime customers to open the door for even more growth in Qwest's services.
Big customers, he knows, typically don't like to do business with upstarts because they are not sure how long, they'll be around. Indeed, constant talk that Qwest has been a buyout target has probably hurt its cause.
"Qwest has all the bandwidth, but not the customers," said telecom analyst Abhi Chaki of Jupiter Communications." All of that bandwidth is useless unless you have the customers."
Yet some analysts point out that Qwest already has a strong relationship with BellSouth -- it acquired a 10 percent stake in Qwest a few months earlier -- and that their alliance should aid the younger carrier's cause. Further, they argue that a deal with U S West could hamper the chance of Qwest eventually being acquired by BellSouth at a premium that would be attractive to shareholders.
Daniel Zito of Legg Mason Wood Walker, however, argues that Qwest's purchase of U S West would actually make Qwest more desirable to BellSouth (BLS: news, msgs).
Widely seen as the best-run Bell -- it ranks first in customer satisfaction in J.D. Power's study -- BellSouth is the last big local phone company not to enter into a major acquisition. The purchase of a U S West-fortified Qwest, the argument goes, would instantly make it a national and global behemoth, with a huge presence in the Western United States and critical possession of state-of-the-art broadband network.
Of course, that begs the question: does Joe Nacchio want to play second fiddle to executives at BellSouth? Or does the congenial but hyper-aggressive Qwest CEO want to remain top dog?
A few years ago, such a question was preposterous. Industry observers figured he would build the company up, find a buyer and retire rich to some Caribbean island. While that may still happen, it's appear less and less likely. With his vision of being one of the few, truly global, high-speed telecom carriers within reach, Nacchio isn't looking to get out.
Qwest is not a one-trick pony," Nacchio asserted Wednesday. "Qwest isn't going away."
Maybe now people will believe him.
Jeffry Bartash is an online reporter for CBS MarketWatch.
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