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Wall Street questions US West merger

Analysts say investors aren't looking favorably at the combination of US West and Global Crossing, as US West shares have lost 10 percent of their value since the deal was announced.

Wall Street may not be happy with the merger between US West and Global Crossing.

The two companies announced their planned corporate marriage Monday, in an estimated $37 billion deal linking US West's local phone business and Global Crossing's undersea fiber optic cable business. In a separate deal, Global Crossing will mesh its operations with Frontier's long distance business.

In the aftermath, however, shares of US West and Global Crossing have slumped. US West has lost more than seven points since its Friday high of 62.5, or more than ten percent of its value. Global Crossing has also lost more than ten percent of its value from Friday by midday today. The fall comes despite a plan to give shareholders a special $1 per share dividend for holding on through the deal's completion.

"We've downgraded US West to sell since the merger announcement," said Mel Marten, a research analyst with Edward Jones. "The market reaction is saying that there is less value in these companies together than there was apart."

The negative market reaction could possibly bring the future of the merger into question, despite executives' insistence that they will make the marriage work. Market and shareholder concerns in recent history have torpedoed equally ambitious deals.

The planned merger between Bell Atlantic and Tele-Communications Incorporated fell apart in 1994, partly after Wall Street sent the Baby Bell's share price tumbling. More recently, the merger between Lycos and Barry Diller's USA Networks dissolved after Lycos shareholders refused to support the deal.

The core objection from Wall Street analysts appears to be that the companies simply don't create a natural fit.

Global Crossing's undersea fiber business has led it to remarkable rates of stock price and revenue growth, turning it into a $26 billion company in just two years. It was able to use its stock price to acquire Frontier in a merger announced in March.

But even those two companies together don't substantially aid US West's business, at least not in the near- to medium-term, many analysts say.

US West is barred by federal regulators from providing long distance service to its own customers, so Frontier would have to divest or otherwise shut down the roughly $18 million of long distance business it does in US West's 14-state service area. That would leave the three companies with attractive--but difficult to integrate--core assets, analysts say.

The other telecommunications megamergers pending make far more sense, critics say. The combination of GTE and Bell Atlantic, or SBC Communications and Ameritech both would wind up expanding their various companies' U.S. reach. AT&T's purchase of cable companies will allow it to embark on an ambitious strategy of local phone and high-speed Internet service.

By contrast, the Global Crossing-US West merger doesn't have those compelling justifications, many analysts say. "It doesn't make a lot of sense," Marten said. "They have very disparate assets and networks."

A better fit would be between US West and BellSouth, or perhaps a three-way deal involving Qwest, he said.

Adding to the concern is shareholders' worries about mixing the stable US West stock with Global Crossing's riskier high-growth shares, said D.A. Davidson financial analyst James Bellessa.

The companies say they will create two separate tracking stocks for the new company, splitting off the high-risk data, wireless and long distance businesses from US West's more stable local phone operations.

But the share price shows that investors aren't convinced the double tracking stock will adequately shield their individual interests, Bellessa said.

"Investors in the more traditional telecom play, the plain vanilla telephony company, now see they are exposed to more risk," he said. "The traditional shareholders might be saying they can't tolerate that risk."

Analysts say the falling share prices will put pressure on US West and Global Crossing's marriage, maybe even breaking it apart.

"There is a definite chance of that," Marten said. "But there's not a lot of other obvious companies willing to step in and do the deal instead."