Qwest: Ciao Nacchio?
"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