Qwest makes a bid to become a telecom giant

Qwest is aiming to become a competitor to companies like AT&Tand MCI WorldCom, which are increasingly offering packages of local, long distance, and data services. As a retail and wholesale long distance company, Qwest can't yet compete in the same business markets.

If Qwest trumps Global Crossing in its bid for US West and Frontier, the firm will gain a valuable revenue stream worth more than $15 billion and get access to US West's local customers. But combining US West's local network with its broadband network will turn Qwest into a mainstream telecom company that the market will judge daily on its performance, rather than on its broadband promises.

Wall Street has been kind to Qwest, along with peers such as Global Crossing and Level 3--even as the firms post negative or small revenue numbers. To be sure, the market has boosted the market valuation of many telco newcomers to mirror the likes of telcos such as US West. For example, Qwest's revenue last year was just $2 billion, compared to US West's $12.3 billion. Yet while US West's market capitalization hovers around $29 billion, Qwest's market cap--even after today's stock slump--is around $24 billion.

Qwest's bid--and Global Crossing's before it--underscores the desire of these telco newcomers to piece together the few remaining independent networks into world-class companies before the snowballing pace of telecommunications consolidation makes this impossible.

"This sets the stage for the fourth or fifth supercarrier that's U.S.-based," said Boyd Peterson, a telecommunications analyst with the Yankee Group.

BellSouth's 10-percent stake in Qwest increases the potential for a new company that could rival giants like AT&T or SBC Communications in local, long distance, and international markets, Peterson noted.

But by aligning their bottom line with the highly regulated US West, Qwest may also experience the downside of entering the top ranks of the diversified telecommunications market.

"The bottom line is they are cutting their growth in half," Brian Hayward, a money manager at Invesco Funds Group, told Bloomberg today. Invesco owns 2 million Qwest shares. "I'm not happy about the stock drop."

The genesis of Qwest's high-stakes bids can be traced to the ambitions of the company's chief, Robert Nacchio. Nacchio, a former AT&T executive who reportedly grew tired of the slow pace of change at Ma Bell, was lured to Qwest by the opportunity to build a cross-country network from scratch.

Qwest's story is similar to that of Global Crossing, which is now headed by Nacchio's former AT&T colleague Robert Annunziata.

But Qwest has a head-start building out its network, and with its early focus on the domestic U.S. market, can likely provide more cohesive working relationship with US West than can Global Crossing, some analysts said.

The focuses of the two competing deals are very similar. Both suitors are seeking to link their existing fiber-optic networks to US West's established base of local phone users, and take advantage of the Baby Bell's experience in rolling out high-speed DSL Internet lines to consumers and businesses. Both companies also want to link these local and long distance assets to Frontier's GlobalCenter Web hosting facilities.

Qwest has already made moves to expand its local broadband presence in recent weeks, taking financial stakes in DSL providers Covad and Rhythms NetConnections, as well as wireless broadband company Advanced Radio Telecom.

"The deal's dynamic is very similar to Global Crossing," Nacchio said in a conference call with reporters today. "But we have a superior offer."

By how much Qwest's offer will exceed Global Crossing's previous bid is an open question, as Wall Street continues to digest the news. Qwest's initial offer of about $41 billion in stock was more than $10 more than Global Crossing's bid--but by the end of the trading day today, Qwest's share value had fallen by more than 20 percent.

"At some point this becomes difficult if your currency is eroding as sharply as this one," said Tom Burnett, founder of Merger Insight, a New York-based institutional analysis firm. "Right now I would say it's a pretty even catfight."

Global Crossing's original offer included the creation of a tracking stock to separate the firm's slow-growth local phone business from its riskier, high-growth data and wireless businesses. Qwest's offer would include just a single stock for the entire company--an element that some financial analysts think will ultimately play in its favor.

"It's much easier to value that way," Burnett said. "It has the advantage of simplicity."

Global Crossing executives said today they still considered their original bids for Frontier and US West to be superior to Qwest's offer, and expected that the deals would go through as planned. US West's offer to buy close to 39 million Global Crossing shares is scheduled to close this Friday.

Nacchio said he had not yet heard back from the US West or Frontier boards by Monday morning, but expected to go into official negotiations within a few days.