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Ex-Microsoft exec now in telecom meltdown

Few can blame Greg Maffei for leaving Microsoft to run his own company and cash in on an IPO, but now he's up facing a communications industry littered with failing companies.

At the time it seemed like a no-brainer.

When Greg Maffei left his post as chief financial officer of Microsoft in late 1999 to become chief executive of 360networks, the software giant was facing a host of legal tangles including a historic antitrust case with the U.S. government. In contrast, the communications industry was on a high-growth trajectory, marked by soaring demand, surging stock prices and mega-mergers.

So few could blame Maffei for jumping at the opportunity to run his own company, cash in on an initial public stock offering and move out of the shadows cast by Microsoft's ever-present duo, Bill Gates and Steve Ballmer.

But Maffei's time in the spotlight has been far from idyllic.

The communications industry is now littered with several failing companies that once were considered strong challengers and sure-bet investments. Among the foundering communications companies are PSINet, Flashcom, Urban Media, NorthPoint Communications and ICG Communications, to name just a few. Even equipment giants such as Cisco Systems, Nortel Networks and Lucent Technologies, and stalwart communications operators such as AT&T and Worldcom, have felt the industry's pain.

So, did Maffei make the right move?

"I bet he regrets it," said Neil MacDonald, vice president and director of software research at Gartner. "A year ago the communications sector looked hot. But Lucent and even bellwethers like Cisco are hurting. I think he made a mistake."

360networks was fresh off an IPO last April when a federal judge ruled that Microsoft should be broken into two companies for violating antitrust laws--making Maffei's flight look all the more prescient.

But shares in the communications sector have since plunged. Profit margins for carriers and bandwidth suppliers such as 360networks are plummeting. As a result, equipment makers are reeling from the downturn, and stock prices throughout the sector are at new lows.

For its part, Microsoft continues to reign as the world's largest technology company, with a value at more than $300 billion. And Microsoft shares have rebounded some from their January lows. Conversely, stock in 360networks has fallen sharply since the beginning of the year and is now hovering near a 52-week low.

Stock in 360networks was sold to the public one year ago at $14 and the shares eventually climbed as high as $24.19. They now trade at about $3 after being pummeled along with countless other telecom and tech shares.

"I was pretty lucky when I got out of Microsoft in terms of the stock being much higher," said Maffei, who left behind as much as $64 million in Microsoft stock options.

As for joining 360networks, "My timing could have been better in terms of the market, but I think we were lucky to raise capital when we did." Those funds are helping the company build a 89,000-mile worldwide fiber-optic network, which is nearing completion.

Executive exodus
Maffei certainly isn't alone in his defection. Dozens of executives spurned large, established companies in recent years in favor of promising communications start-ups. For example, another former Microsoft executive, Brad Silverberg, left the software giant to found Ignition, where he invests in wireless Internet companies.

Similarly, Joe Zell left US West a year ago to join Convergent Communications, a smaller networking company. And the CEOs of most of the DSL (digital subscriber line) wholesalers such as Covad Communications and others all came from a Baby Bell pedigree.

Analysts say these executives hungered for the chance to have a greater impact at smaller companies. The opportunities offered a new challenge, they say.

"There were a lot of people who left Microsoft and rolled the dice on the Internet," MacDonald said. "For somebody who's got a lot of ambition, it was going to be hard for (Maffei) to spread his wings. He was just a cog in the big machine at Microsoft. Where at a smaller company, he had a chance to make a bigger name."

Maffei agrees with the assessment, saying in a recent interview that he longed for a new challenge.

"I came over because I'd had a great run at Microsoft, but how do you find a new challenge at a company like that?" Maffei said. "The idea was appealing to help build this from the ground up. Microsoft had enormous success before I got there, and they've had success since I've left."

According to a June 2000 360networks regulatory filing, Maffei owned nearly 10 million "multiple voting shares," or a 12 percent stake, and more than 52 million "subordinate voting shares," for a 7.6 percent stake in the $2.5 billion company.

Other analysts say Maffei already handled many duties typically reserved for a chief executive while in Redmond and was ready for the next step.

"Greg had a wonderful reputation while at Microsoft," said Dwight Davis, a vice president and software industry analyst at industry consultants Summit Strategies. "He was a very active CFO. He was involved in a lot of their work in mergers and acquisitions. The company does a lot of deals and investments, but Greg--I had a sense--was a driver of that.

Courting a corporate star
"By all accounts he was doing quite well and was a savvy guy. He was clearly being courted by many companies, and he pretty much had the choice to pick and choose where to go," Davis said. "I don't think it was a stretch for him to become a CEO. In many ways he was covering a lot of the areas that a CEO would cover while at Microsoft, beyond just finance."

But the communications sector downturn and Microsoft's ongoing dominance has led some analysts to second-guess Maffei and other defecting executives.

"In retrospect it maybe wasn't the best choice," Davis said. "Had he stayed he might have wondered if it was the right move, but compared to where he ended up, he may wish he was still under the Microsoft umbrella. Many different sectors have been hit--some harder than others--so he could have been in worse waters; he could have joined a dot-com."