Qwest chief executive Richard Notebaert was at a sit-down with MCI’s Michael Capellas in a dark-paneled Chicago meeting room when he was handed a note that derailed their multibillion-dollar merger talks and put Notebaert in a very tough spot.
In the Chicago Club, Qwest chief financial officer Oren Shaffer passed his boss the note, stating that The Wall Street Journal was about to break the story of Qwest’s bid for MCI – a bid that had been seven quiet months in the making.
According to a source close to Qwest, Notebaert read the note, turned to Capellas and another MCI official and said: The Wall Street Journal is going to report tomorrow that we are working on a deal.
The MCI executives commiserated about the leak, said it was unfortunate, and suggested that it would complicate the negotiations, Shaffer recalled.
Analysts speculate that MCI may have leaked the Qwest negotiations to coax a bid from Verizon – its preferred merger partner. MCI has declined to comment.
But if Notebaert experienced a flash of suspicion or annoyance at the Feb. 2 meeting with Capellas, he never showed it.
“There was no ‘Oh, pshaw,’ or anything like that,” Shaffer recalled.
Notebaert has had to be cool under fire as he pursues MCI and fends off Verizon. In the past month, he has displayed a dogged persistence against long odds. He has shown a deft touch on Wall Street and revealed an aggression not often seen in the three years he has led Denver-based Qwest.
Soon after the Chicago meeting, MCI accepted a $6.75 billion offer from Verizon, but Notebaert refused to yield. He made an $8 billion counterbid, sparking a mini-revolt by key MCI shareholders seeking the best deal possible.
Notebaert tasted a small victory last week when the MCI board reversed itself and – with Verizon’s approval – agreed to reopen negotiations with Qwest until March 17.
Notebaert forced MCI’s hand by taking his case to Wall Street, meeting with MCI shareholders and analysts at a breakfast Qwest held in a gilt- trimmed room at the St. Regis Hotel, overlooking the snow-dusted trees of Central Park. He greeted his guests with a smile and a quick handshake that gave little indication of the hard-boiled dealmaker within.
A “predictable” CEO makes a bold move
Notebaert, who ran Chicago-based Ameritech for five years, took over deeply troubled Qwest in June 2002. Qwest’s stock price was on life support, suffering from an accounting scandal that had triggered investigations by the Securities and Exchange Commission and Department of Justice.
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A MONTH OF BIDDING
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Notebaert sold assets to help whittle down Qwest’s $26 billion debt load to $17.2 billion. That is still more than double the company’s current $7 billion market value.
He nursed the Denver-based phone company back to something resembling stability. But Qwest, which serves a largely rural territory, still faces irrelevance in an industry consolidating into a few behemoths such as Verizon, valued at $101 billion, and SBC, valued at $81 billion. SBC is buying AT&T for $16 billion, while Sprint and Nextel have announced their own $35 billion merger.
Shaffer, who has worked with Notebaert for more than 10 years, calls Qwest under Notebaert “predictable, determined, boring.”
But last summer, the “predictable” Notebaert did the unexpected. He made a play for MCI, the nation’s second-largest long-distance company, at a time when conventional wisdom suggested that Qwest would either be acquired or sell itself off in pieces.
With MCI, based in Ashburn, Va., Qwest would gain valuable large-business and government contracts. MCI also has $5 billion in cash that could help tame Qwest’s debt. And Notebaert claims that the combined companies’ workforce of more than 80,000 employees could be slashed by up to 15,000.
“We have a superior bid, and even if you don’t think it’s superior, there’s clearly potential for a superior bid,” Notebaert told investors last week in New York.
The savvy way Notebaert has pursued MCI comes as no surprise to those familiar with the man behind the folksy demeanor. He has a talent for rolling with the punches, said Shaffer, who has been deeply involved in negotiations for MCI.
Denver Mayor John Hickenlooper, who worked his way from unemployed geologist to successful brewpub owner and then mayor in 2003, said he has never met anyone who works harder than Notebaert.
“Everybody thought a smaller company with more debt couldn’t be the suitor, and yet he looked at it and saw a number of opportunities,” Hickenlooper said.
Trying to transform a Bell, then selling it
Executives who worked with Notebaert at Ameritech saw his hard-charging side during the mid-1990s, when he pushed for regulatory approval to sell long-distance service. Ameritech, Qwest-predecessor US West and other Baby Bells had been limited to selling local phone service inside their regions since the 1984 breakup of AT&T.
“He looked around and said, ‘I can’t survive in the environment we have now. I’ve got to do something dramatic to change the environment,”‘ said former Ameritech public-policy executive Larry Strickling. “You see that now with his efforts to transform Qwest.”
But federal regulators and Ameritech could not agree on what level of local competition constituted an open market within Ameritech’s five-state region. Stymied from offering long-distance service, Notebaert finally gave up.
“It was frustrating to live in the old Bell telephone mold of everything being regulated, when Dick Notebaert saw the future and wanted to embrace it and lead,” said Doug Whitley, who ran Ameritech Illinois in the 1990s and now leads the Illinois State Chamber of Commerce.
After the long-distance failure, Notebaert changed course. Consolidation swept through the industry in the late 1990s, and the pressure was on big players to get bigger. In 1999, San Antonio-based SBC bought Ameritech for $72 billion.
Some in Chicago felt the highly profitable Ameritech should have been the acquirer. But for Notebaert, the deal was about rewarding investors.
After a stint running Tellabs, a telephone equipment manufacturer outside Chicago, Notebaert answered a call from the Qwest board, which had ousted CEO Joe Nacchio. Notebaert would take over Qwest, the runt of the Baby Bells.
If Notebaert wins MCI, he will have pulled off one of the most unlikely takeover bids in recent history.
“You’ve got a unique asset out there (MCI) he has determined he wants to have, he needs to have,” Strickling said. “It requires you to be very determined and dogged in your pursuit, because when it’s gone, it’s gone. It’s not like there’s another place to go.”
If Notebaert loses, he’ll be back to running a tugboat among supertankers and facing the prospect of Qwest itself being acquired. Some have even suggested that bankruptcy might be the best solution to clear the debt from the books. Notebaert says that Qwest has options, although he has not described them.
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RICHARD C. NOTEBAERT
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“Qwest is the unwanted child, the orphan of all the telecom companies,” said analyst Pat Comack of Zachary Investment Research in Miami. “Buying MCI would make them attractive. Without MCI they just don’t fit into the equation.”
Qwest’s options may include a proxy battle
When The Wall Street Journal published the story of Qwest’s bid for MCI on Feb. 3, Notebaert was on the ropes.
By Valentine’s Day, Verizon had announced a $6.75 billion bid for MCI. Speaking in Boulder, Notebaert said, “We are moving on.”
Moving on to challenge Verizon’s bid, it turned out. Notebaert launched a multi-pronged strategy that included challenging MCI’s board, attacking a Verizon-MCI combination as anti-competitive and upping Qwest’s bid to gain support from key MCI shareholders, such as Leon Cooperman, who owns 3 percent of MCI shares.
A spokesman for Mexican billionaire Carlos Slim Helu, who controls 13.7 percent of MCI shares, said that Verizon’s bid was “too low” and that Qwest’s bid was an improvement but also “insufficient.”
That may put pressure on Verizon to sweeten its offer, although so far the company has shown little interest in doing so.
If MCI sticks with Verizon, Notebaert’s last option may be a proxy battle, in which Qwest would seek to persuade a majority of MCI shareholders to support its bid. MCI holds its annual meeting May 16.
Notebaert has walked away from other negotiations. He bid $390 million in 2003 for Allegiance Telecom but let it go when XO Communications Inc., controlled by financier Carl Icahn, bid $646 million.
“We’ve never done a deal in my career where we didn’t have a walk-away price,” Notebaert said when he made that bid. “You never fall in love with anything.”
Staff writer Tom McGhee can be reached at 303-820-1671 or tmcghee@denverpost.com .
