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Qwest's bid for US West shakes Wall Street

Qwest makes a $55 billion hostile bid for US West and Frontier over the weekend, setting up a high stakes bidding war with undersea cable player Global Crossing.

Qwest Communications International made a $55 billion hostile bid for US West and Frontier over the weekend, setting up a high-stakes bidding war with undersea cable player Global Crossing.

The battles for US West, one of the regional phone companies, and Frontier, a long distance and data services firm, highlight the growing need for communications players to expand their customer base to remain competitive.

But Wall Street hasn't bought that strategy yet. News of the $55 billion hostile bid hit Qwest's stock this morning, with shares in the high-flying firm plummeting as much as 23 percent.

Qwest launched its unsolicited offer to acquire both US West and Frontier last night, with a series of letters signaling the start of a bidding war with Global Crossing, another of the new breed of fiber optic-focused telecommunications companies.

Global Crossing had earlier offered to pay about $42 billion for both companies, in a risky effort to turn its undersea fiber-optic cable business into a full-service communications company with a national local and long distance network.

That deal also ran into criticism from analysts and investors on Wall Street, as shares of both US West and Global Crossing tumbled.

In a conference call with reporters, however, Qwest chief executive Joe Nacchio played down the market's reaction, saying the company had expected some negative response.

"Most people haven't had a chance to digest the model," he said. "But as we grow to become a large cap stock, we will roll over some of our investor base. We knew that going in."

Nacchio said today that his own long-term strategy is similar to Global Crossing's. But because Qwest is a more mature company, it is able to offer more to the target companies' shareholders, he added.

"The deal's dynamic is very similar to Global Crossing," Nacchio said. "But we have a superior offer."

Complicating the mix could be BellSouth's 10 percent stake in Qwest. Nacchio confirmed today that the two companies were close in contact during the run-up to yesterday's bid.

Analysts have speculated that a combination of Qwest, US West, and BellSouth assets could create a "supercarrier" that would be able to compete with larger companies like AT&T and MCI WorldCom.

Broadband everywhere
Qwest's driving goal is to roll out broadband communications, such as high-speed digital subscriber line (DSL) Internet service, across the country, Nacchio said.

US West is the smallest of the Baby Bell companies, serving as the dominant local phone company in a 14-state region across the West and Pacific regions. But it also has been one of the quickest local players to roll out DSL service to its customers, and has experimented with other advanced services such as video over telephone lines and high-speed wireless data connections.

Frontier has local and long distance businesses, as well as a substantial Web hosting center. Together, the two companies' expertise and existing infrastructure would dramatically boost Qwest's ability to roll out broadband service across the United States and beyond, Nacchio said.

"We won't define our territory as 14 states. We define it as the world," Nacchio said. The combined company would see 80 percent of new revenue after the year 2001 come from the data business, he said.

But if the advantages in Nacchio's mind are substantial, so is the price he is willing to pay.

Qwest's offer for US West initially totaled more than $41 billion, or more than $10 billion above Global Crossing's own bid for the Baby Bell. That also marked a premium of more than 45 percent above US West's value at the close of markets on Friday, though the size of the offer and its premium declined sharply as Qwest's share price dipped today.

Global Crossing said today that it expected its bids for Frontier and US West to go through without change despite Qwest's entry.

"Our existing US West merger agreement is superior to Qwest's offer, and we fully expect to close it as planned next year," said Robert Annunziata, Global Crossing's CEO.

Qwest's original bid of about $13.6 billion for Frontier also marks a substantial increase on Global Crossing's offer of $11.4 billion.

Analysts said that the addition of US West and Frontier's revenue stream and customer base would be good for either Qwest or Global Crossing, both of which are still in the early stages of defining their business and attracting customers.

"What this really shows is that Qwest and Global Crossing don't really have a business of their own," said Hilary Mine, a telecommunications analyst with Probe Research. "Now they have their market capitalization up and can afford to buy a real business."

Nacchio said he had not heard back from US West or Frontier, but expected a reply within several days.

He declined to comment on whether he would be willing to take his bids as far as a proxy fight if the two companies' boards of directors refuse to accept his offers.