Level 3 Up, Qwest Down

Only the spectacular self-inflicted wounds recently revealed at the major carriers—plus the intervention of Warren Buffet—could give competition a final chance in this hostile regulatory environment.

by Jim Wagner of internetnews.com [July 9, 2002]

The flip side to the sagging stock value is the opportunities it creates for a buyout, something James Crowe, Level 3 chief executive officer, intends to do with the $500 million investment his company garnered in an announcement Monday.

"The ongoing shakeout is creating extraordinary opportunities, as telecommunications companies, their network assets and customer bases become available," he said. "We are fortunate to have both network management expertise and financial dry powder, which will allow us to continue pursuing opportunities that create value for our stockholders."

The half-billion dollars in spending money comes courtesy of three investment firms, led by Longleaf Partners Funds, which took $300 million in "subordinated" notes. Berkshire Hathaway (owned by tech-leery billionaire Warren Buffet) and Legg Mason, Inc., each contributed $100 million to the Level 3 investment.

In addition to telecom buyouts, Crowe said the monies raised would be used to reduce capital expenditures and other back-office expenses.

Level 3 said its new backers have attributes that make it a desirable investment risk, as opposed to some of the other troubled carriers, like WorldCom.

Liquid resources and strong financial backing are scarce and valuable assets in today's telecommunications world; "Level 3 has both," said Buffet. "Level 3 is well equipped to seize important opportunities that are likely to develop in the communications industry."

While many backbone providers like WorldCom, Global Crossing, and Qwest Communications are going through legal and financial troubles these days, Level 3 has escaped largely unscathed. Promising investors (and federal regulators) its accounting books are in order, Crowe dodged a bullet.

That's largely due to the financial fire it avoided last year, when it laid off 25 percent of its employees and went on a self-imposed diet to reduce corporate fat

Qwest for profit
In contrast, Qwest Communications, a product of numerous acquisitions, is going back to the basic business of being a regional Bell operating center (RBOC), judging by the senior management housecleaning conducted by its new chairman and chief executive officer.

Richard Notebaert instituted an almost complete revamp in the way the Bell runs its business, reorganizing the telephone company into three units—consumer, business and wholesale—all led by old hands in the telecom industry.

Qwest has been treading financial dissolution since the beginning of 2002, when it became embroiled in its own Enron-style accounting scandal.

The new Qwest chief is well-known in the telecom industry, notably from his tenure as chairman of Ameritech, where he gained notoriety from rumored reports of gutting the telephone company just before its merger with SBC Communications in 1999.

But what gained Notebaert notoriety with one Bell might stand him well with the company he runs today, according to one analyst at META Group, a Stamford, Conn., research firm.

"He was actually known for heavy cost-cutting and turning over what was really considered a minimally-functioning enterprise over to SBC," said David Willis, META Group vice president of global networking strategies. "That says two things: this guy is going to slash and burn where he has to and treat the business like it's an RBOC business and that spells bad news for the national service."

RBOC is a term that's fallen out of favor, and has become increasingly obsolete, in today's telecom market. Focusing on regional telephone and network services isn't as sexy and lucrative as providing national and international services like frame relay, virtual private networking (VPN), and webhosting.

"They're going to focus on in-region service and in getting long-distance approval try to get customers end-to-end," he said. "Anything that's outside of that is going to be superfluous and may well get sold off."

Back when the telecom industry was drinking venture capital by the billions, spreading operations onto the national and international stage was as easy as spreading butter. But with the burst of the dot-com bubble, the telephone companies were forced to compete with a crowded field of carriers providing the same services.

As a result, Willis said, "the sales force will give hefty discounts just to show any kind of revenue growth whatsoever."

Qwest officials need look no further than BellSouth for an example of a successful RBOC. With the notable exception of its joint wireless phone venture (Cingular Wireless) with SBC, BellSouth has managed to excel where the other incumbent telephone companies have failed: digital subscriber line (DSL).

While officials at Verizon Communications and SBC bemoaned the state of DSL deployment throughout the U.S.—blaming either the competition, the Federal Communications Commission (FCC) or both—BellSouth shined in its DSL growth.

Also noteworthy is the company's absence in nationwide services, something the other Bells maintain is essential to keep shareholders happy.

Further proof the company is getting back to the basics is the makeup of Qwest's new senior management, made up primarily of old hands from Notebaert days at Ameritech, when it was an RBOC.

• Oren Shaffer, the new Qwest chief financial officer replacing Robin Szeliga, worked at Ameritech from 1994 to 2000.
• Joan Walker replaces Michael Tarpey, who retired last April, as senior vice president of corporate communications. She held the same role at Ameritech from 1996-1999 and was president of the Ameritech Foundation.
• Gary Lytle is Qwest's new vice president for policy and law. Lytle is a long-time Ameritech hand, first as vice president of government affairs for Michigan Bell (an Ameritech subsidiary) and then as vice president of Ameritech's federal relations. Before joining Qwest, Lytle was the interim president and chief executive officer for the U.S. Telecom Association (USTA).

In the Internet industry as a whole, the news may be brighter. A new report from Webmergers.com shows the number of shutdowns and bankruptcies by dot-coms in the first half of this year fell 73 percent from the same period last year. Only time will tell whether this trend will continue, or whether the next bankruptcies will be those of the behemoths battered by accounting fraud.

— End