Telco bidding war reaches friendly end

Undersea fiber-optic cable company Global Crossing and long-distance newcomer Qwest Communications have agreed to split the spoils, with Qwest buying US West and Global Crossing retaining its original $11 billion agreement to purchase Frontier.

"As result of our combined scale, scope, and growth character, we believe this transaction positions Qwest to be the benchmark large-capital growth company in the new millennium," Qwest CEO Joe Nacchio said in a conference call with reporters today.

Qwest's final bid for US West totals $69 a share, or about $36.5 billion at current stock prices, and also includes taking on about $12 billion in US West debt, the companies' executives said. The new company will have a market capitalization of about $65 billion.

The agreement marks the end of a month of uncertainty for shareholders and employees of all four companies.

Tangled Web
Global Crossing had originally struck agreements to merge with both Frontier and US West, using its high stock price to help subsidize the creation of a local, national, and international network.

But late in June, Qwest chimed in with its own bid for both companies, which was initially considerably higher. Its stock immediately dropped precipitously, evening out the two bids. But Qwest upped its offer slightly, finally prompting the negotiations that led to the agreement announced today.

Qwest and US West each underscored today that the merger's vision is based on expansion of their high-speed Internet access businesses, along with more traditional long-distance, local, and wireless voice services.

US West has taken an early lead among local phone companies in rolling out digital subscriber line (DSL) technology inside its 14-state territory, along with experimenting with pushing cable TV and video-on-demand services over these high-speed lines.

Nacchio said the merged company would expand its DSL business quickly after the close of the merger.

"We will be expanding our business as a [DSL provider] into 25 cities outside our region, principally in territories occupied by SBC Communications and Bell Atlantic," he said. "There's going to be a lot of growth."

Nacchio said the California cities of Los Angeles, San Diego, San Francisco, San Jose, Sacramento, and the Orange County region would be included in this expansion.

Global Crossing does emerge from the battle with a little extra cash on hand to help ease the pain of losing the larger prize.

As part of a negotiated break-up fee, US West will pay Global Crossing $140 million in cash, will return the nearly $140 million in Global Crossing stock it recently purchased as part of its original merger agreement, and will agree to buy about $140 million worth of capacity on Global Crossing's network over a two-year period.

The money will help Global Crossing go bargain-hunting elsewhere, the executives said. With the current bidding war behind it, the company is turning to a "mix of strategic international and U.S. acquisitions, selected local loop buildouts, and employment of advanced technologies to link our network to key customers."

The company will get Frontier's U.S. long-distance network, a small base of local phone networks, and one of the top full-service Web-hosting companies in the business.

The agreement leaves the hard work to Qwest and US West, which now must figure out a way to integrate companies with very different networks, cultures, and shareholder bases.

Regulatory scrutiny
A first step will be to convince regulators that the deal should be approved. Qwest and US West tried once before to join forces in marketing long-distance service, but were shut down by regulators who said the local phone company could not yet participate in the long-distance market.

This time around, Qwest will likely divest any long-distance business that it conducts in US West's 14-state territory, at least until US West has proven to federal regulators it has opened up its local markets to competition by other phone companies.

In an interview with CNET News.com shortly before the deal was announced, Federal Communications Commission Chairman William Kennard declined to comment on the specific deal, but said any agreement between the companies would receive close scrutiny.

"The fundamental question that we ask and will always ask is whether this is in the public interest. Will consumers get tangible benefits?" he said. "We have to look at these on a case-by case basis."

If the merger clears the regulatory hurdles, the new Qwest still risks becoming far more unwieldy than the quick-moving newcomer to the long-distance voice and data market it is today. Its newly acquired local phone business will still be tightly regulated by state utilities commissions, and the company will be thrown into the state and federal political battles that still draw considerable time and resources from all the big local phone companies.

The companies also will have some touchy management issues to overcome. US West CEO Sol Trujillo will become a co-chairman of the board of directors, as well as president of the new company's broadband and local-phone division. The new 14-member board of directors will be split evenly between Qwest and US West members.

But the chain of command will ultimately stop with Nacchio--marking a step down for Trujillo, who had negotiated a shared CEO role as a part of the original Global Crossing agreement.

Trujillo, however, said he would be happy with his new role. "You've got to have one person in charge of the way the business runs, and that person is Joe," he told reporters.