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U S West-Frontier Deal Warps Into Qwest's Impossible Dream

Joe Nacchio's bid increasingly reminds Seymour of the need for a Sancho Panza figure.

If CNBC has Stock-Picking Friday, and Rush Limbaugh has Open-Line Friday, can you and I do Dealmaking Tuesday here for a minute?

The market is obviously still unhappy with the offer by

Qwest

(QWST)

, which I am long, to acquire

U S West

(USW)

and

Frontier

(FRO) - Get Frontline Ltd. Report

, but the Denver whirlwind is doing all it can -- short of gracefully backing away from the offer -- to win back investors' confidence. Or, to put it less generously, to distract us from the bad deal.

Monday, Qwest announced a joint venture with

KPMG

to build a joint-venture application-service provider, or ASP, business. Good timing: ASPs, which allow corporations to use big software apps on an as-needed basis, are just about to explode. (Keep reading for more here on ASPs later this week.)

The new company,

Qwest Cyber.Solutions

, sounds like a plausible and potentially very profitable joint venture. KPMG has already built credibility in the corporate outsourcing/corporate services market, and in fact will be transferring about 450 applications specialists from its current consulting practice to the new company. Qwest, the 51%/49% majority owner of the new enterprise, is throwing in some existing contracts with independent software vendors and corporate clients, and preferred access to its network of Cybercenters around the country -- plus John Charters, Qwest vice president for business development, as CEO. Phil Garland, KPMG's head of applications outsourcing, will be COO.

I wish the timing of this announcement hadn't followed so sharply on the heels of the market's negative reaction to the U S West-Frontier offer. It makes Qwest look like a company in trouble, trying to move the walnut shells around faster than we can follow.

That said, while I still think Qwest shareholders are best served by a continuing focus on laying cable and leasing bandwidth, it's easy to understand Qwest CEO Joe Nacchio's desire to get into businesses with more immediate revenue opportunities, such as its growing long-distance-provider business. And I'm an unabashed bull on the prospects for the ASP business over the next decade.

So maybe this really is the right deal at the right time, not just sleight of hand. Maybe.

Back on the main stage, Qwest's pursuit of both U S West and Frontier -- both of which have dusted off the offers -- seems lost in the woods. Even if the proposed acquisition targets were ready to join Qwest, it's clear the deals could not be concluded with Qwest's stock in the Dumpster. Yet the only thing likely to pump Qwest back up into at least the mid-40s, where it had languished for a while before the offers were made, is ... you guessed it ... Qwest's definitive withdrawal of the acquisition offers.

As I've written here

before, acquiring Frontier wouldn't be all that bad an idea for Qwest, though it's hardly a necessary, nor even a very good deal. But break-up fees owed by both U S West and Frontier to Qwest's opponent in this battle,

Global Crossing

(GBLX)

, in the unlikely event that they were to choose Qwest -- plus the lack of collars in both deals -- continue to make this the Deal From Hell for all concerned.

Except, perhaps, for Global Crossing, in which holders would be well served by a graceful retreat by management from its offer. But

that

won't happen unless and until Global Crossing sees U S West or Frontier throw in with Qwest, because Global Crossing would be foolish to walk away from those potential break-up bounties.

See what I mean about the Deal From Hell nature of this one?

I think Qwest management will come to its senses, realize that it's put itself in a no-win game and back away. No doubt that action -- which could come as soon as the end of this week -- will be accompanied by a lot of huffing and puffing by Qwest managers over their noble motives in folding their tent.

Heck, there's nothing noble here:

They lost

. But Joe, there's nothing ignoble about admitting defeat and jumping back on the fast-growth track. The Street would reward a clean break with a nice bump in Qwest shares, and Nacchio & Co. would regain some of the street credibility as

el primo

TheStreet Recommends

telco strategists they threw away by this misguided offer.

What should Qwest shareholders do? For myself, I'm sitting this one out. The damage has been done to the share price, and there's nothing to be gained at this point by bailing.

AOL and the Self-Evident Good

In contrast to the mess in Denver,

America Online's

(AOL)

announcement Monday of its investment of $1.5 billion in a special

Hughes Electronics

(GMH)

convertible issue is what philosophers call a self-evident good.

The big issue is that AOL gets yet another partner in offering fast access to its customers. As I suggested

here in May, AOL's going to knit together a group of these deals, which will give it protection against customer erosion in the face of alluring offers by cable-modem and telcom DSL vendors, which are eager to steal ISP customers wherever they can find them.

As I said then, I think America Online is going to be just fine, despite those who worry that the explosion of interest in fast-access accounts elsewhere will cripple AOL. And I also think that a couple of years out, we'll see that AOL will have positioned itself as the poster child for DSL through deals with telcos across the country. I still expect to see AOL alliances with cable companies -- the AOL dealmaking machine finds partners wherever it can -- but more and more, AOL is going to be seen as the salvation of the telcos' genetic sluggishness in jumping into the fast-access world.

This should surprise no one. Looking back at AOL over the past several years, it's clear that its prowess as a dealmaking machine, plus its relentless marketing and the power of its brand name, are what have propelled AOL into its present leadership in the Internet market. It's not the quality of AOL email offerings, nor the strength of AOL's proprietary content, nor, certainly, its customer nonsupport, that have driven that growth: It's partnerships ... plus all those damned CDs.

AOL structured this one neatly. Not only did its $1.5 billion buy a valuable alliance, it also bought $200 million in advertising on AOL by Hughes (only the unkind will call this a kickback). Plus, those converts pay 6.25% a year for the next three years, then flip into General Motors Class H common -- the Hughes tracking stock created by GM. If Hughes can light a fire under its so-far misguided and overpriced small-dish data services -- it's signed up only about 40,000 Internet-access customers so far, mainly desperate folks who can't get fast access any other way, because they're in the boonies or are served by one of the RetroBells -- and if it can get its new two-way Internet access service,

Spaceway

, out the door over the next three years on schedule, this investment could look sweet, indeed, for AOL holders.

On Dealmaking Tuesday, we always look for hidden back-scratches, and there was a major one here: The AOL-Hughes deal was announced on the same day that Hughes had to tell the markets it expects to lose 20 to 25 cents a share in the second quarter, thanks to a $100 million to $130 million pretax charge arising from problems with satellites. Always nice to have a tidy and highly distracting deal to announce when you have to take bad news to market.

Now for the Good News

Finally, one of the most rewarding of yesterday's deals -- ever notice how all these Monday announcements of deals make it seem as if Corporate America spends its weekends in a No-Tell Motel somewhere, negotiating? -- was the announcement that both

MCI WorldCom

(WCOM)

and Daddy Warbucks -- oops,

Paul Allen

-- have each invested $300 million in

Metricom

(MCOM)

.

Metricom has for more than two years been peddling a pretty nice locally based wireless Web-access service,

Ricochet

. But it's only been available in a few cities, and Metricom's announcement earlier this year that it was expanding Ricochet service to another 25 cities was seen in the wireless business more as a sign of a company that Just Didn't Get It in terms of the speed needed to hold onto a market lead than as a boost for Metricom.

Now, with $600 million of new cash from Allen and MCI WorldCom, Metricom promises to be much more aggressive on its national buildout. I'm skeptical that even $600 million -- chump change in the business of building a national network of wireless services -- will be enough to do the job fast enough. Metricom still risks being remembered in a

Harvard Business School

case study as the company that proved up a business model for another, more aggressive competitor, which then took away Metricom's lead.

But clearly there's more where this came from. If in a few months Metricom realizes what it really needs is another $2 billion or so to do the job well enough, fast enough, the presence of Allen (who with this investment holds on to his 49% stake in the company) and MCI WorldCom at the table will reassure the debt and equity markets more than enough to make additional capital readily available.

If, of course, Allen doesn't just dip into his deep pockets and buy operating control for another billion or two.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long MCI WorldCom and Qwest, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.