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Qwest CEO outlines plans for former US West

Qwest Communications International chief executive Joe Nacchio outlines a strategy that makes it painfully clear that the US West culture he has been critical of will die a quick death.

Qwest Communications International chief executive Joe Nacchio has been waiting for this moment.

Meta Group says Joe Nacchio's plans for slashing jobs, selling off nonstrategic assets and otherwise re-engineering US West--an old-style regulated telecom company--into a competitive, free-market company are on target.

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Nacchio detailed his plans yesterday for polishing US West, the Baby Bell local phone company Qwest acquired in July 1999, and for combining and restructuring the two Colorado-based companies. His formula? A swift face-lift and a strategy that makes it painfully clear that the US West culture he has been critical of will die a quick death.

First, more than 11,000 jobs will be cut by the end of next year. The lower head count, stock option grants and new employee stock purchase plans will create new incentives for US West employees used to bureaucratic ways.

"We are going to create an entrepreneurial culture," Nacchio said.

But Nacchio also will ax many programs, technologies and investments that don't fall into one of three primary themes for the new organization: high-speed, or "broadband," Internet services, wireless communications, and data hosting. Already, Qwest plans to sell more than half a million local phone lines--US West's core business--and investment stakes in 15 companies, which combined will generate about $2.75 billion in proceeds for the company.

Nacchio and his team have ratcheted the company's capital investment budget slightly higher and plan to spend $9 billion in 2000 and $9.5 billion in 2001 on improvements and upgrades. Chief among them is a plan for Qwest to invest heavily in high-speed digital subscriber line (DSL) Internet connections and wireless communications, two strong assets the company acquired via US West.

The company also plans to significantly expand its CyberCenter Web hosting capacity, a high-growth area into which Qwest already has delved.

Facing the task
The task has not, and will not, be an easy one. After all, Qwest, formed in the mid-1990s, is an advanced fiber-optics-based communications carrier designed for consumer Internet services and data communications for corporations.

US West, meanwhile, is one of the regulated local phone companies created by the antitrust breakup of the old AT&T monopoly. The company's networks and technologies are older, as are its culture and management style.

Wall Street fretted when Qwest announced its intention to take over the Baby Bell last year, an unprecedented move that marked the first time a non-Bell would acquire a major local phone company. Previous consolidation in the sector consisted of other Baby Bells as the acquirers, merging to create massive geographic phone empires.

Analysts said there is little Qwest can do to subdue the criticisms of the merger, short of laying out a clear plan and simply executing it.

"The only way to allay the fears is to do what you've said you're going to do," said Drake Johnstone, vice president at Davenport & Co., a regional brokerage firm that follows Qwest. "They've laid out the game plan going forward. But if they fail, watch out."

Analysts said the plans outlined today will take years to implement.

"The extent to which Qwest is able to transform US West will determine whether it ends up looking like a 'souped-up' Bell or like a next-generation carrier with a strong local presence," Goldman Sachs analyst Frank Governali said in a research report today. "Clearly, the goal is the latter, but this will not become obvious or visible for several years."

Narrowing the focus
Nacchio, a former rising star at AT&T, is not partial to languishing.

Instead, he hopes to put a shiny new finish on the combined company by creating employee and executive incentives, implementing a new product-based management structure and narrowing the company's focus on some of the communications industry's fast-growing sectors.

Nacchio described US West's previous approach as one of "a lake a mile wide and an inch deep."

"US West was like a lot of big companies. US West did a lot of things because they could afford them," he said. "There's been a lot of pruning and a lot of refocusing."

Now, Nacchio has focused his attention on two red-hot industries. Rather than using US West's copper phone wires and wireless systems primarily for voice, Qwest intends to beef up the DSL and wireless businesses for high-speed Net access and other highly profitable newer services. Executives believe they will double the customer base of both businesses by the end of next year.

Already, Qwest has raised revenue and earnings estimates for the next two years.

Although the combination of Qwest's long-distance, Internet and hosting assets with US West's huge customer base, local and wireless properties makes for an attractive combination on paper, analysts have said shaking the expected culture clash could be dicey.

For one, investors in most Baby Bells expect slow, steady growth with quarterly dividends. Internet-based companies such as Qwest are geared to grow quickly and often face volatile stock prices when the market dynamics shift on the fly.

Still, Qwest, even after swallowing US West, has positioned itself to take advantage of the exponential growth in Internet access, data services and other Web-related businesses. For example, the company today served notice on upstarts such as iBeam Broadcasting, RealNetworks, Digital Island, Akamai and a slew of content distribution and streaming media companies when it introduced a new digital media subsidiary.

And analysts have faith that Qwest can put US West's assets to good use.

"Despite the fact that US West historically has a bad reputation, they have been aggressive about new services," Johnstone said. "US West has been more successful in deploying DSL than any other telco."

And while other major players such as WorldCom and AT&T have announced slower growth in recent months, Qwest has continued to grow its business behind the strength of Internet-based offerings.

"Qwest is generating the highest growth of any of the big-cap established telcos," Johnstone said.

Provided Wall Street analysts, investors and, most importantly, his employees embrace the new strategy, Nacchio could find himself boasting one of the nation's finest communications companies in a few years, analysts said. If not, he may be left picking up the pieces.