Allegiance CEO Sheds Feud-Filled Approach as New Opportunity Calls

The captain of this up-and-coming CLEC now relies more on cooperation with the Baby Bells.
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Texan Royce Holland broke into telecommunications by making enemies. As co-founder of

MFS Communications

in 1988, Holland had a game plan to hurt the Baby Bells in the fashion in which

MCI

(now

MCI WorldCom

(WCOM)

) went after

AT&T

(T) - Get Report

: Assault the prime turf and crack the monopoly in the courtroom.

But now Holland is spreading the word of peace and prosperity among the warring parties. As the founder and CEO of

Allegiance Telecom

(ALGX)

, a relatively new competitive local exchange carrier, or CLEC, Holland's role is to make money in the fragmented telecom market.

With MFS, Holland built the network hoping that the business would come. With Allegiance, Holland is pursuing the business first under the assumption that the network will come.

"Royce invented the phrase 'smart build,' which analysts now use to describe a genre," says Reed Hundt, an Allegiance board member and a former head of the

Federal Communications Commission

. "Getting the customer and then building the network as needed," Hundt says, "is a reversal of the historic telecom way and a revolutionary concept."

Allegiance sells businesses an array of services, including local and long-distance phone service, high-speed data communications and Internet access via digital subscriber lines, or DSL. Thanks to Holland's connections and the company's large cash horde, Allegiance may turn out to be one of the CLEC winners.

Dialing Up
Stock prices since May 4

Source: Baseline

In the eight years before it was acquired by

WorldCom

, MFS buried 90,000 miles of fiber-optic networks under the streets and sidewalks of 46 cities from New York to San Francisco, all the while fighting the Bells in a dozen courts and in more than 100 regulatory proceedings.

Aside from the $500 million investment from construction billionaire Peter Kiewit, Holland had few allies in the beginning -- especially among regulators.

"We were upending a century-old concession, and that was very threatening and disturbing to a bunch of complacent incumbents," says Andy Lipman, a former lead attorney for MFS.

In 1991, after two years of lawsuits, appeals and regulatory pleadings, MFS won a landmark decision to create the nation's first local interconnection agreement, which forced the then seven Baby Bells and

GTE

(GTE) - Get Report

to open their networks to MFS, so that it could sell local phone services.

To celebrate the victory, Holland treated his top managers to a night out at the nearby Outback Steak House in Oakbrook Terrace, Ill. "We were much more of a beer crowd than a champagne crowd," Holland says.

The bubbly would flow again in 1996, when WorldCom paid $13 billion for MFS. A few months later, nearly all the top MFS officials bailed to start up their own ventures. James Crowe, chairman and CEO of MFS, took about a dozen members of his team to start up

Level 3 Communications

(LVLT)

, an Internet-based supercarrier, again with backing from Kiewit.

Holland, who pocketed $25 million from the MFS sale, jumped ship in 1997 and persuaded

Bear Stearns

investment banker Tom Lord to start Allegiance with him in Dallas. Holland also took along his team -- as much as 20% of Allegiance's staff of 1,400 originally came from MFS.

WorldCom founder Bernie Ebbers sued Allegiance for poaching MFS talent, but earlier this year, after 18 months in court, the companies reached a truce. "WorldCom and Allegiance enriched the

American Bar Association

for over a year, then we both picked up our marbles and went home," says Holland. An MCI WorldCom spokesman said Ebbers was not available for comment.

Allegiance is now one of MCI WorldCom's better customers. Holland "knows where the fiber is," says Dan Zito, who covers Allegiance for

Legg Mason

in Baltimore. Zito has an outperform on Allegiance, and Legg Mason hasn't done underwriting for the company.

Allegiance has moved quickly among a pack of nimble upstarts that include

Covad Communications

(COVD)

and

NorthPoint Communications

(NPNT)

. Its share price has outpaced rivals, and analysts expect Allegiance to break even in 2001, a year ahead of all other CLECs. Allegiance reported $17.7 million in revenue in the last quarter, more than 13 times the $1.2 million it logged in the prior-year period. On the downside, though, losses expanded to $49.2 million.

But Allegiance is sitting on a pile of cash: It has raised $1 billion, through an IPO in July 1998 and through private capital investments. Earlier this month,

Microsoft

(MSFT) - Get Report

co-founder Paul Allen agreed to chip in $355 million through his

Vulcan Ventures

for an initial 2.3% stake, with options for an additional 8%. Vulcan gains a board seat and obtains a future distribution network for Allen's grand Internet content plan.

Allegiance is ahead of schedule in its rollout, opening service in 16 of its 24 major markets, including Atlanta, Boston, Los Angeles, New York and San Francisco.

And instead of fighting the Bells, Holland is working with them to make sure they can successfully synchronize their operations with Allegiance. Basic functions like handling billing information, service orders and even phone numbers are incredibly complex -- especially when the antiquated Bell computer programs won't play nice with other companies' programs.

That's why Holland is finding it easier to play Mr. Nice Guy.