Qwest, U S West, Deutsche Telekom and an Undone Merger Deal

The world, for the time being, shall continue to be divided into little telecom fiefdoms.

Poor timing and clashing cultures and egos seems to have undone what promised to be the big-bang merger that was to have set off a new era of truly global carriers. As a result, the big Qwest (Q)-Deutsche Telekom (DT) deal is off, and U S West (USW) shareholders may face a few sleepless nights worrying if the public's acrimonious displays will doom the pending U S West/Qwest matrimony.

In the wake of DT's withdrawal and Qwest's hollow-sounding pledges to adhere to the merger agreement, U S West shares Friday dropped 6 1/8, or 8%, to close at 70 3/8, while Qwest shares fell 7 1/8, or 12%, to 52 7/8.

Two Pictures

Investors say two likely scenarios lie ahead for Qwest and U S West. Most likely, the two companies will complete the merger in the third quarter and together entertain offers from Deutsche Telekom or another international carrier.

But the other -- and, for U S West shareholders, unsettling -- possibility is that Qwest and U S West could run into complications in the deal's 14-state approval and divestiture process. Qwest must transfer its long-distance customers to other carriers in the states where U S West is barred from state-to-state toll service. If the merger is delayed to the end of the year, both parties are free to walk away. Of course, that would likely mean a number of bidders for Qwest and a less-packed dance card for U S West.

It was a week that opened with Qwest's largest shareholder, billionaire railroad tycoon, Philip Anschutz, entertaining an offer from Deutsche Telekom. Soon after, Qwest Chairman and CEO Joseph Nacchio made no secret that with DT in the picture, there were ways out of Qwest's pending merger with U S West. U S West warned Qwest that talks with other suitors amounted to a breach of their merger agreement. By Friday, DT had pulled out of the on-again, off-again talks, and Qwest and U S West were awkwardly attempting to renew their vows.

In a fitting touch to cap off a frantic week, the Federal Communications Commission Friday granted conditional approval to the Qwest-U S West merger at a time when the top management of the two companies were communicating with each other only through press releases.

Friends Were So Knocked Out

Nacchio, addressing investors at the Credit Suisse First Boston Global Telecommunications Conference at the Plaza hotel in New York Friday, said the DT episode was "one of the most bizarre things I've lived through." He was referring to what he termed U S West's unwillingness to consider anything other than the companies' agreed-to ratio of Qwest shares for U S West shares.

But observers say Nacchio may be the one who had the most to do with the breakdown in talks.

"Joe's got a big mouth and it was bound to get him in trouble," says one telecom analyst who asked not to be identified. The analyst was referring to Nacchio's unsubtle message that Qwest would be better off unattached to the slow-growing Baby Bell.

Some investors at the conference agreed that Nacchio's attempt to distance his company from U S West put U S West in an unfavorable light. U S West had no choice but to cling to the original merger agreement, said hedge fund manager Michael Kaufman of K Capital Partners, which is short Deutsche Telekom and holds a position in U S West. "Why blow up what you have and risk U S West going back to $50 a share?" asks Kaufman. Indeed: U S West stands to get around $90 a share in Qwest stock under the deal.

Just for Feet

U S West Chairman and CEO Solomon Trujillo said his company remains committed to the Qwest merger, but Trujillo has already voted with his feet on the merger and said he will not be a part of the combined company.

Trujillo, who is also known as one of the more strong-willed personalities in the industry, said Thursday that his decision was based on what he thought was best for the combined company. "I did not want to see a divided company with two sets of values," he said.

Nacchio said Trujillo quit because the combined board favored a more Qwest-like management direction.

The weeklong episode suggests that perhaps the biggest barrier to global communications companies isn't the compatibility of the networks, but the compatibility of the people who run the networks.

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