Qwest Communications International Inc. was a growth stock when the market closed June 11. Portfolio managers were treating it as a laggard three days later.
The telecommunications company saw its stock price drop into the low 30s last week after it made an unsolicited bid June 12 -- revised June 23 -- to take over U S WEST Inc. and Frontier Corp.
In doing so, Qwest also sought to scuttle the plans of Global Crossing Ltd., which had agreed last month to acquire and merge U S WEST and Frontier.
Qwest Chief Executive Officer Joseph Nacchio said his company is a better fit for U S WEST, which is building an all-digital telecommunication network and plans to provide broad-band products and services.
"It's irrefutable that combining ourselves with U S WEST will accelerate the current path they are on, which we support," Mr. Nacchio said in a conference call. "A clear examination of the facts would demonstrate that we have a significant leadership position and significant technology partners to help them realize their vision."
Mr. Nacchio did not address Frontier's role in the deal.
His vision, however, runs counter to that of many investors.
"There is some negative sentiment about Qwest," said Eric Weigel, senior vice president with Boston-based Pioneer Global Institutional Advisors. "The perception is he didn't have to do this deal at this point."
U S WEST is one of the slower growing regional Bell operating companies, said Mr. Weigel, a view shared by many investors. "Frontier is viewed as being a pre-emptive attack against Global Crossings," said Mr. Weigel, who continues to own Qwest in the Pioneer Mid-Cap Growth Fund. Mr. Weigel said Qwest comprises 1% of his $800 million fund.
"If I would have contacted Qwest, I would have liked to question them about their strategy and why it makes sense to them," said Bill Turner, senior equity analyst with Banc One Investment Advisors, Columbus, Ohio.
Banc One unloaded much of its 692,000-share position a week before the bid, when rumors about the bid began to circulate.
Northern Trust Global Investments completed the sale of its position in Qwest after the announcement of the bid, said Ken Turek. The money manager sold much of its holdings in the week before the bid was made.
"It (the bid) changes the story of why we owned Qwest in the first place," Mr. Turek said. "It was a fast growing telephone service provider.
"By branching out to become an MCI WorldCom wannabe, it didn't fit with why we owned them in the first place."
Even shareholders who have decided to stay in the stock are not clear about the kind of company they have on their hands. They remain confident, however, because of Mr. Nacchio's track record of enhancing value and his large stake in the company.
"That is a real good question," said Robb Parlanti, when asked why he remains a shareholder. Mr. Parlanti is an analyst with Turner Investment Partner Inc., Silver Spring, Md. He owns about 317,000 shares.
"The management team is top notch," he said. "They are aggressive, and we are used to aggressive teams.
"Long term, the company is in a sweet spot in the telecommunications arena. It will be volatile in the near term.
"We're still shareholders, and we will be closely monitoring the situation."
Mr. Weigel of Pioneering said QWEST made its bid for U S WEST because the company needs to gain economies of scale, get access to customers and to begin to produce earnings.
Qwest's stock now is "valued on a lot of hope in the future," Mr. Weigel said. "He (Mr. Nacchio) realizes that and has to buy real companies that are established businesses.
"That is the rationale for going after U S WEST. Sooner or later they will have to deliver real earnings."
Several stock watchers, however, question whether U S WEST is the company with which Qwest should seek to align itself.
Mr. Turek said Qwest is paying a "dear price" for U S WEST. "U S WEST is not a stellar RBOC," he said.
Although he was not very familiar with Frontier, Mr. Turek said it might be more appealing because it is a long-distance communications company.
In the week before the bid for
U S WEST and Frontier, Atlanta-based BellSouth Corp., in a regulatory filing with the Securities and Exchange Commission, said it is exploring options related to its 10% stake in Qwest, "including transactions which may result in the acquisition of a control position in or combination" with Qwest.
"I thought a BellSouth combination was a better way to go, and that is probably what the market is hoping for," Mr. Weigel said. Qwest shares rose $3.69 to close at $47 June 10, the day the filing became public.
Investors hope that if Qwest's bids for U S WEST and Frontier fail, BellSouth will acquire Qwest, Mr. Weigel said.
"BellSouth has better growth prospects and better management" than U S WEST, he said.
