January 14, 2000 12:30 PM PST

Qwest struggles to fit with US West

An aggressive business strategy made Qwest Communications International a Wall Street favorite when the company went public in 1997 and carried it through some rough times on many fronts.

Since then, however, Qwest's luck has changed--most markedly in the months after it decided to buy local phone company US West in a controversial bidding war. Although Qwest has steadfastly maintained that the merger will Joseph Nacchio allow it to move at the speed of light, the high-flying firm has faced bitter criticism and has seen its stock price falter following the deal.

Some have tried to portray the proposed merger, to be completed by midyear, as a triumph of "new world" technologies over "old world" traditions. The regional Bell phone companies are among the nation's largest and most powerful corporations, while upstart Qwest was formed in 1996.

Yet many analysts say the merger is akin to David marrying Goliath. The Bells--with their old networks and massive workforce--stand in stark contrast to upstart telecommunications firms like Qwest and Level 3 Communications, which are building state-of-the-art networks at Internet speeds.

The blockbuster merger between America Online and media giant Time Warner this week also gave investors pause. Many were concerned that the purchase of a traditional media company would slow the fast-growing Internet giant.

Similarly, some analysts fear that the Qwest-US West combination could hamper Qwest's growth or even distract the company from its original goal: to be a serious competitor in the communications market.

Qwest stock chart "They're buying a Bell," said Lisa Pierce, Giga Information Group director of global telecommunications. "Part of the company values new things, but you still have that slower side of the business."

Even so, after six months of hand-wringing and second thoughts, Qwest executives say they are more certain than ever that their $37 billion buy was a smart move.

"Everybody said, 'You're the biggest idiot in the free world. Why did you do this?'," Qwest chief executive Joseph Nacchio said during a recent interview with CNET News.com. "I'm more convinced than ever we made the right choice, and it'll be evident when the deal is closed."

The multibillion-dollar deal may have been a marriage of necessity, many analysts say. The communications market is rapidly moving to provide "end-to-end" bundles of services, including voice, data and video. The challenge for many carriers is to extend high-speed connections from a large global network right into individual homes. By buying US West, Qwest gains access to millions of local customers and the wires that serve them, as well as significant profits that can be used to fund newer high-growth businesses in the near term.

"We saw some attractive assets that we can do new things with," Qwest chief operating officer Afshin Mohebbi said.

Analysts say that although there may be early concerns for Qwest-US West, investor focus should be on the long term. "The may have to pause momentarily, but I think they will continue to go forward as innovators," American Fronteer analyst J.C. Simbana said. "It'll be more of a pause, as opposed to a complete stagnation of the growth we've seen up to now."

Qwest's stock price has nearly returned to original levels last seen prior to its merger announcement, showing that investors may finally be comfortable with the new look of the company. Shares sank through the summer before recovering this past fall.

Despite the ongoing questions and criticisms, Qwest executives have faith that their strategy will be validated.

"I think we've demonstrated in the last six months that Qwest is Qwest," Nacchio said. "I think our investors…feel good that we can handle a big merger like this, with a company so much bigger than us, and not lose sight of what we are."

Still, there will be many sides of the new Qwest. Some analysts say the company will concern itself primarily with using the steady flow of cash from US West's local voice business to fund other high-growth areas of the company--without investing in basic services.

"My real concern is the existing (US West local voice) customers who get to pay to be neglected. It's the cash cow. You milk the cow," Giga Information Group's Pierce said.

Qwest's strategy to combine the old and the new may work. But it is a step back from an earlier vision held by many upstart communications firms. Many companies, including Qwest, believed that Internet protocol (IP) networks would help them gain a cost advantage over older carriers.

"What we've learned in Qwest's case is that the more you want to be all things to all people, the more you need to have the new and the old (technologies)," Pierce said.

But many critics argue that Qwest, which up to now has operated as a fiber-optic network builder and Internet firm, may have trouble meshing with the corporate culture of a monolithic local phone company.

"Most of us (executives) are refugees out of those kinds of companies," Mohebbi said. "We're not going back to those cultures."

 

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