plenty of grief recently about the company's accounting for a deal with a start-up called Calpoint.
But maybe they're worrying about the wrong thing.
Rather than the
accounting treatment, which
Qwest revised after its stock got hammered, perhaps the more worrisome element of the deal for Qwest shareholders should be the unimpressive performance of two companies associated with Calpoint's principals.
One of those companies, for the most part, was dismantled this summer. As for the second company -- one that Qwest itself invested in last year -- all it has to show for itself is an electronic mouse pad that the
Los Angeles Times
showcased last year as a high-tech "Turkey to Avoid."
These companies' difficulties call into question Qwest's apparent faith in the California-based start-up, a company that Qwest says will speed its entry into a new business known as managed wavelength services, an advancement over current optical-networking technology. If, indeed, Qwest believes that the new services represent an important market for the company, little in the Calpoint principals' recent past would be a cause for optimism.
At stake for Qwest, which says the Calpoint deal has a net present value of $250 million, is not only the quality of its revenue, but also Wall Street's confidence in the company's ability to develop new services in a perilous telecom market. On Thursday afternoon, Qwest's shares fell 65 cents to $16.55. That puts Qwest's shares down 14% from their price before the Calpoint-induced slide.
Fire for Qwest
Little is known about Calpoint itself, which apparently raised more than $500 million last month in a private placement of debt. Since July, various Calpoint entities have been registered as limited liability corporations in California.
Samuel M. Surloff, listed in filings as a Calpoint representative, didn't return phone messages left at the number corresponding to his address in the filings. Calpoint couldn't be found under California directory assistance, and Qwest did not supply requested contact information for the company.
Regarding Calpoint, Qwest President Afshin Mohebbi said on a conference call Monday, "The principals of this particular venture are also principals in a company called mysmart.com." Indeed, Sam Surloff is listed on mysmart.com's Web site as senior vice president and general counsel.
Former Packard Bell head Beny Alagem, chairman and founder of mysmart.com, is one of the co-founders of Calpoint, according to a report written by Banc of America Securities analyst Andrew Hamerling.
Another principal of Calpoint, according to several sources, is James McGovern, a onetime undersecretary and acting secretary of the U.S. Air Force and a former president of Teledyne Brown Engineering, a defense and space contractor. More about McGovern below.
Building a Better Mouse Pad
As for mysmart.com, last year the company debuted its first and evidently only product: a mouse pad with buttons on it that a user can press to jump directly to certain Web sites. Some buttons are preprogrammed by mysmart.com to go to favored destinations, and others are programmable by the user.
Unfortunately, mysmart.com didn't build the proverbial better mouse pad. The $20 gadget "is an especially aggravating product," according to the
, "because it's geared to lure those new to the Internet with the promise that it will make their online lives simpler. It won't."
characterized mysmart.com's mouse pad as an interesting idea poorly executed, with a surface too slippery to even function as a decent mouse pad. "The bottom line: Your old mouse pad isn't as bad as it seems."
mysmart.com has sold about 50,000 of its mouse pads at retail, estimates Stephen Baker, director of research at the market research firm NPD Intelect, which tracks consumer electronics sales through
and other retailers. By comparison, says Baker, consumers bought about 3 million keyboards last year, not including those already packaged with PCs. The data suggest that the mouse pad is heavily rebated, says Baker, indicating that the product isn't highly valued by the market.
Alagem and Surloff didn't respond to messages left at the mysmart.com office.
mysmart.com's difficulties shouldn't be a surprise to Qwest; after all, the Denver-based telco invested $5 million in mysmart.com last year, adding to a $30 million stake from Softbank Capital Partners and Softbank Capital Advisors Fund. The investment was tied to a three-year, $32 million contract Qwest won to supply Internet services to mysmart.com.
On the conference call, Qwest CEO Joe Nacchio made extremely clear that his company has no investment in Calpoint, nor any responsibility to guarantee any loans Calpoint has taken out from other sources. But Nacchio didn't mention that Qwest had already made its investment in another venture of Calpoint's principals -- a relationship that might have been of interest to investors curious about the arrangement between Qwest and its new business partner.
A Qwest spokesman defended Nacchio's nonmention of the Qwest investment in mysmart.com. "In no way, shape or form did we mislead anyone," the spokesman said. "The question was, did we have an investment in Calpoint?"
The second ill omen for the Calpoint deal is the fate of Vault Technologies, a California-based provider of managed services -- in other words, an outsourced supplier of information technology needs, similar to the way that
is an outside supplier of payroll services.
Principal investor in Vault was Alagem, according to Steven Cohen, an attorney who was formerly a sales development executive with the firm. CEO of the firm, says Cohen, was former Air Force undersecretary James McGovern.
Vault ceased most operations this summer, a victim of a market that probably won't be ready for services of its type for a few years, says Cohen. He also cites technical problems and the firm's inability to raise venture money beyond Alagem's.
But Cohen doesn't blame McGovern for Vault's downfall. McGovern is "very smart, very motivating, an excellent manager," says Cohen. McGovern, who has a voice-mail box accessible through mysmart.com's phone system, didn't respond to a message left for him there.
The Qwest spokesman suggests people shouldn't worry about Calpoint's expertise. Calpoint, which plans to open an office soon in Denver, has "a wealth of experience in both the
information technology and the telecommunications fields," the spokesman says. Calpoint is hiring optical-network experts and technicians, the spokesman adds, including people affiliated with 360networks, which filed for bankruptcy protection this summer.
It all sounds so promising with Calpoint. Just as it once did for mysmart.com and Vault Technologies.