Business News - Qwest, US WEST Agree To Merge in $34.7 Billion Deal

Posted: 09/1999

Qwest, US WEST Agree To Merge in $34.7 Billion
Deal
By Liz Montalbano and Ken Branson

In what comes as little surprise and ends more than a monthlong standoff between two of
telecom’s most significant players–Denver-based Qwest Communications International Inc.
and Hamilton, Bermuda-based Global Crossing Ltd.–Qwest and Denver-based US WEST Inc. have
agreed to merge.

The No. 4 long distance carrier, in turn, withdrew its offer for Rochester, N.Y.-based
Frontier Corp., which is expected to steam ahead with its planned $10.9 billion merger
with Global Crossing.

The agreement between Qwest and US WEST is a stock swap worth $34.7 billion, which
means Qwest is paying about $69 a share for the regional Bell operating company (RBOC).
The combined company will retain Qwest’s name.

Joseph P. Nacchio, Qwest’s chairman and CEO–and who New York-based Bank of America
Securities senior telecom analyst Mike Renegar says has been at the helm of the deal all
along–will keep his hands on the tiller as the new company’s chairman and CEO. US WEST
Chairman, President and CEO Solomon D. Trujillo, meanwhile, will become chairman of Qwest
and president of the new company’s broadband local and wireless business.

"This seems to be the best possible outcome for all the parties," says
Jeffrey Kagan, an Atlanta-based telecom industry analyst, of the merger.

But while Jonathan B. Haller, director, Internet and network services analysis for
Sterling, Va.-based Current Analysis Inc., agrees Global Crossing, Frontier and US WEST
are winners in this deal, he begs to differ about Qwest.

He feels Global Crossing scores by winning itself a national network in the United
States, "the most important telecom market in the world," and that Frontier will
benefit from Global Crossing’s worldwide undersea and terrestrial networks.

As for US WEST, the smallest Baby Bell should be grateful someone came along and beefed
it up, especially a company such as Qwest, which is, as Haller says, "the darling of
Wall Street, with its broadband national network."

But Haller thinks Qwest may be like a child on Halloween–after it goes home and enjoys
its spoils, it may end up with a big, fat bellyache.

"I never have liked the Qwest acquisition of US WEST," he says decisively.
"Qwest doesn’t come out looking good, because they’ve got this high-powered,
fast-moving entrepreneurial culture that’s driving as fast as lightning, and now they’re
going to be saddled with a company that has the culture, the legacy problems, the legacy
network [and] the rural territories."

Aside from the difficulties in pairing contradictory business philosophies, Qwest more
than likely will have to tell its long distance customers in US WEST territory to find
another provider. On the ladder of Section 271 compliance, US WEST barely has its foot on
the bottom rung, and the RBOC won’t win approval to offer in-region interLATA (local
access and transport area) service until its markets meet the 14-point competitive
checklist mandated by the Federal Communications Commission (FCC). Since that agency
already nixed a proposed Qwest/US WEST joint venture that allowed the incumbent to market
long distance in-region last year, the combined company will have a better chance at
selling an iMac to Bill Gates than it would at offering long distance in US WEST
territory.

Of course, Nacchio has said he is willing to relinquish that service in US WEST
territory–for now, anyway. Qwest hopes US WEST will win approval by January 2002, but if
it does not, Nacchio is willing to spin off or sell its interLATA operations in states
where US WEST cannot offer long distance by next summer.

This apparent nonchalance over losing long distance service supports the general
consensus that Qwest’s play for the RBOC was never about increasing its long distance
market–it was about cold, hard cash.

"This is mostly a financial deal," Renegar says. "Qwest needs cash flow.
They have a network, and they need traffic on it."

Haller, too, says the more than $4 billion in revenue a year US WEST will earn Qwest
was a big catalyst for the merger. He foresees Qwest using that money to fund its network
buildout and Internet and applications services.

But money isn’t everything, and Haller still thinks Qwest is getting a little more than
it bargained for by merging with Ma Bell’s problem child. In his Current Analysis report
on the merger, Haller writes, "Our disdain for an acquisition of US WEST is
well-documented, and the final resolution doesn’t serve to alleviate our concerns. The
RBOC has a vulnerable local position, no wireless market share, no international holdings,
a small (but growing) data services division, a reputation for poor customer service, and
a monopolistic and bureaucratic culture.

"Qwest’s acquisition represents an astonishing case of a ‘next-generation’ carrier
morphing into a ‘legacy’ carrier," he says.