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Qwest: Ciao Nacchio?

Will the chief executive officer’s chair soon be up for grabs at Qwest Communications International Inc. (NYSE: Q)? Word on the street has it that investors and stockholders are not happy with recent news surfacing from the Securities and Exchange Commission (SEC)’s investigation into the company, and that they are calling for a management shakeup. Many say CEO Joe Nacchio will be the first to go.

"There is turmoil inside the company because of the scrutiny,” says Frank Dzubeck, president and CEO of research firm Communications Network Architects. “The investment community is looking for a sacrifice, and Joe Nacchio is the most visible.”

Another source at a leading hedge fund, asking to remain unnamed, says the investment community is getting impatient -- and they believe it's time for Qwest to move on to a new CEO. "People want to get rid of Nacchio," he says.

Dzubeck and hedge-fund managers aren't the only people talking about Qwest needing a change in management. Former employees are also calling for Nacchio's head.

“Over the last month, we have nicknamed him Mr. Nasty,” says Howard Rickman, the ombudsman of the Association of US West Retirees, who works with and represents all of the retirees of what is now Qwest. “When I go to retiree meetings, one of the first questions I get is ‘Why don’t they get rid of Nacchio?’ ”

While Rickman acknowledges that many of Qwest’s problems can be attributed to the overall malaise gripping the telecom industry, he says that Nacchio has to take some of the blame. He points out that the company has only increased pensions once since 1990, and that, because of a fund transfer, many retirees will soon have to pay a large premium for their health care. Rickman also says that when the bottom fell out of Qwest stock, the older stockholders were especially hard hit. “He has alienated a lot of people,” he says. “And people have long memories.”

Dzubeck, however, insists that the call for sacrifice has nothing to do with Nacchio's personally. “If it’s not him, it will be someone else visible,” he says. “I respect Joe a great deal. He’s done a fantastic job at Qwest.”

If the board of Qwest is planning to get rid of Nacchio, the plans are recent. According to a report this morning by the Associated Press, the board extended Nacchio’s contract through 2005. The extension happened last fall, at which time Nacchio received 7.25 million new stock options that he can cash in late 2004 and 2005. In addition, he will receive $194 million if Qwest shares reach the $43 level they once traded at. At closing today, the company’s stock was trading at $7.26.

Chris Hardman, a spokesperson for Qwest, says that the company has no intention of replacing any of its management team. “We believe that we have the right management team to lead the company,” Hardman says. “And we have the right blend of assets -- one of the most unique blends in the industry. This will help Qwest moving forward.”

Dzubeck emphasizes that he’s basing his comments purely on things he’s heard. But, he says, speculation around whether or not Nacchio will be pushed out has been running rampant in both hedge funds and banking houses since the announcement several days ago that Qwest is taking a $20 billion to $30 billion non-cash charge in connection with the US West merger (see Qwest Revises, Retraces, Replies).

But there are probably other issues that have stockholders screaming for blood. The main concern, Dzubeck says, has to do with the SEC investigation of Qwest for partaking in now famous hollow capacity swaps, or IRUs, that have gotten several other carriers, like bankrupt Global Crossing Ltd. (NYSE: GX), in trouble. Apparently, 67.5 percent of Qwest’s 2001 optical capacity sales revenues can be attributed to swaps.

The fact that the SEC is unhappy that Qwest only reported its pro forma results for last quarter probably didn’t help either. Technically, the company should have put the Generally Accepted Accounting Principles (GAAP) financials in there as well.

The company is still saddled with an approximate $3.4 billion debt load (see Qwest Amends Credit Agreement). This, in addition to the questions circulating around Qwest’s accounting practices, has put the company’s credibility seriously at risk.

"I think the Qwest management is struggling with gaining credibility on the Street, says RBC Capital Markets analyst David Bank. “[The company] has a spotty record in terms of meeting Street expectations in earnings, as well as in accounting for certain revenue items.”

While Bank would not comment on whether or not he thinks Qwest will soon see a change of management, Guzman & Company analyst Patrick Comack says that a change in management could occur if the company restates its earnings. “If they restate,” he says. “I think that management will be under a lot of pressure.” However, he continues, “if the company gets a clean bill of health from the SEC, it’s full speed ahead.”

Qwest’s Hardman says he can’t reveal what the company is doing to calm investor fears, since it is in an official quiet period until the announcement of its financial results for the quarter. “We are constantly striving to execute our business plans,” he says.

— Eugénie Larson, Reporter, Light Reading
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cruiser 12/4/2012 | 10:39:56 PM
re: Qwest: Ciao Nacchio? he's not mr. sunshine, no, and like every other carrier on the planet he's guilty of some questionable accounting and revenue sharing stuff...

but this guy bought an rboc before rbocs were cool (they're still not cool but they're cooler than ixc's and clecs). they paid a lot for uswest but the thing is a genuine asset. level 3 is dying. global crossing / fronteir is dead. att? without cable they are just a long distance company and will be snatched up by someone by late 03. yes, an american institution more than a company, att will no longer be an independent company. wcom? hurtin' for certain. so why should qwest get rid of the guy who set them up to survive? they're the only ixc that will remain independent and it's because of joe. you don't find that kind of vision and initiative just anywhere. they will never replace him.
Vesting 12/4/2012 | 10:39:52 PM
re: Qwest: Ciao Nacchio? You are obviously neither a stock holder or a retired or active Qwest/US WEST employee.
optblues 12/4/2012 | 10:39:48 PM
re: Qwest: Ciao Nacchio? Is this a US West v. Qwest thing? What did Nacchio do to upset the former US West crowd? Did he change the retirement benefits? I mean besides kill the stock while watching the other RBOCs hold somewhat better, he's been great.

And if I was a Qwest shareholder, I would say that Nacchio pulled off the coup of the year by takig over USWest to gain cash flow like he did.
let-there-be-light 12/4/2012 | 10:39:46 PM
re: Qwest: Ciao Nacchio? Nacchio for qwest?
Nachos for rest?

Who cares?

Bring on the movies!!
fiber_diet 12/4/2012 | 10:39:44 PM
re: Qwest: Ciao Nacchio? Qwest would no doubt be in a similar state as Global Crossing or Williams had it NOT been for the US West acquisition. US West is a steady stream of cash flow. Despite the bad press about RBOCs, they do generate lots of cash.

I noticed in the article that Nachio stands to gain (I'll be nice with the selection of the word 'gain') from the investor community with his compensation package. Doesn't this manifests itself to aggressive accounting? Price target is reached, he cashes out, bails, and 'its not my problem'.

I think the real victims here have been the retirees and and loyal US West workers. I don't know much about how the benefits and relationship to stock performance are packaged, but I would speculate that US West's stock would have performed much better without Qwest.

Does anyone believe Qwest will go under?
deepciscothroat 12/4/2012 | 10:39:43 PM
re: Qwest: Ciao Nacchio? As a long-time Cisco Employee, all this banter about Nacchio really amuses me. Let's look at the facts

1. Joe is a big blow hard that has not innovated anything.
2. He lined his pockets and destroyed shareholder value
3. Everyone on his payroll is on the take from vendors. Mohabbi is a relentless shake-down artists
4. Qwest is toast. The question is who will eat them
5. Frank Dubzcek is a relentness, no-nothing gadfly. He keeps bragging about building IBM global services with Sam Palmissano. Call Sam and ask him if the fat windbag did a thing.
6. US WEST sucked even more than Qwest. They sold of the individual assets (wireless and cable to make a few execs rich)

imo - throat
fleet_line 12/4/2012 | 10:39:42 PM
re: Qwest: Ciao Nacchio? Any former AT&T folks remember when Nacchio pushed this on to the voice network as a differentiator? Whitney Houston sang in the adds to demo the "improvement".
The non-linear treatment of DS0's wreaked havoc with modems and other stuff.
Belzebutt 12/4/2012 | 10:39:42 PM
re: Qwest: Ciao Nacchio? I remember the True Voice ad. Everyone in the NOC stood up in awe as they saw Whitney and the real-time 3D graphs of her voice on the giant screens. I switched to AT&T immediately.
Vesting 12/4/2012 | 10:39:37 PM
re: Qwest: Ciao Nacchio? >Does anyone believe Qwest will go under?

The Government (SEC/PUC's/FCC and perhaps even the Justice Department) cannot allow the RBOC side of Qwest to "go under". I am afraid that they may be forced to spin off the revenue draining side of the former Qwest and allow it to die like everyone else. My further fear is this may bring back the return of regulation. That can't really help anyone.

I will agree that US WEST at many times looked more like US Worst but they were in a constant growth mode. Albeit at a snails pace. How long before the PUC's start screaming about held orders again. Held orders were at a peak when US WEST was slowing growth. Qwest has killed it altogether.
willywilson 12/4/2012 | 10:39:23 PM
re: Qwest: Ciao Nacchio? "Another source at a leading hedge fund, asking to remain unnamed, says the investment community is getting impatient -- and they believe it's time for Qwest to move on to a new CEO. 'People want to get rid of Nacchio,' he says."


There might be good reasons to get rid of Nacchio, but one of them is NOT because "investors" and/or "hedge funds" want him to go. These "investors" are the same ones who drove Q's stock price to $60 a couple years ago. They didn't know anything then, and they sure as hell haven't gotten any smarter.

The telecom industry has just about killed itself by listening too closely to the fad of the moment on Wall Street at the expense of long-term corporate fundamentals. The whole relationship with "investors" needs to change.

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