October 8, 1999 12:15 PM PDT

Qwest needs to grow to compete

NEW YORK--Despite its recent merger activity, Qwest Communications International is still a dwarf among telecommunications giants.

Comparing the size of Qwest with a combined MCI WorldCom-Sprint or even AT&T, chief executive Joe Nacchio said that his company ultimately will have to grow to effectively compete in the rapidly changing telecommunications market. His comments come as some analysts speculate that BellSouth could possibly make a bid for Qwest.

"Do I think Qwest-US West is large enough? With Sprint and MCI WorldCom at a $170 billion market cap? Clearly not," Nacchio said. "It would be foolish of me to say we're big enough."

Qwest's planned merger with US West--scheduled for a shareholder vote on November 2--will give the long-haul fiber-optic communications company a local presence, billions of dollars in annual revenue, and access to US West's high-speed Internet access technology. But recent megamergers have put new pressure on industry players to find other partners before federal regulators decide such pairings are hurting competition.

Following BellSouth's failed bid for Sprint last week, the industry is watching closely to see what the Bell's next move might be. Many analysts point to Qwest as a logical acquisition target, since BellSouth already holds a 10 percent stake in the quickly growing firm. Global Crossing, which recently completed its own acquisition of Frontier Communications, has also been rumored to be a BellSouth target.

Nacchio said he talked to BellSouth executives this week, regarding the companies' joint operating agreement. Yet he said he's not legally privy to any merger bids before they happen, since he's under contract with US West.

"I'll be the last to know. But the next four weeks could be interesting," he said, referring to the upcoming shareholder vote.

But despite the speculation that BellSouth--or even Deutsche Telekom, which is looking to expand overseas--could bid for his company, Nacchio said he was committed to finishing the US West deal.

"We've got to digest that," he said.

And MCI WorldCom is a long way from completing the Sprint merger, which has been sharply criticized by federal regulators, he noted. "We've got time to assess [their merger]," he added.

Expansion plans
Even if a huge deal isn't on the horizon, Nacchio said he has other expansion plans on tap.

Federal regulators are widely expected to require Sprint and MCI WorldCom to shed some of their Internet and data network assets for federal approval. Nacchio said he'd definitely bid on some or all of the properties, which would be a substantial addition to Qwest's existing high-speed network.

In a speech at the Fall Internet World '99 industry trade show here, Nacchio defended his decision to buy local phone company US West, which some analysts have said could slow the growth of the high-flying company.

"Some people think that we've come full circle and tried to become a [regional Bell operating company]," Nacchio said. "That's not why we did it."

US West is the largest, most advanced Bell involved with high-speed Internet services, using a technology called digital subscriber line (DSL) that uses regular telephone lines, Nacchio said. The company had already invested in smaller DSL companies like Covad Communications, but needed something larger that could help them introduce broadband on a much wider scale.

"That deal is really about growth. It's about our ability to control what we saw as the largest DSL player in the country," he said. Qwest has already tapped US West's skills for DSL services in New York, as part of a plan to kick off similar products in 25 cities across the United States, he noted.

Still, he said in a later interview that BellSouth--which is too large for Qwest to swallow itself, but which analysts say could be a good merger partner--would bring largely the same technology to the table.

"They really do understand the importance of broadband," he said. "We're very pleased with our relationship with them."


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