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Qwest/US West

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  • Paul Rosa
    This story about the Qwest/US West merger was the lead article in today s Denver Post. It presents an astounding chronicle of the wrecking of a phone company.
    Message 1 of 1 , Dec 15, 2002
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      This story about the Qwest/US West merger was the lead article in
      today's Denver Post. It presents an astounding chronicle of the
      wrecking of a phone company.

      12/15/02 Denver Post

      Wired for trouble
      At post-merger Qwest, aggressive new culture led to
      questionable deals

      By Miles Moffeit and Kris Hudson
      Denver Post Staff Writers

      Sunday, December 15, 2002 - Qwest executives could see their company on
      the edge of a sinkhole. They could see it as clearly
      as chief executive Joe Nacchio's glare across the conference table.

      It was October 2000, and the leaders of the phone-book division were
      frantically explaining to Nacchio that they couldn't meet his
      lofty new revenue targets.

      They couldn't do it, the QwestDex team explained, without crippling
      their business. And they couldn't use an accounting maneuver
      he ordered to boost immediate revenues - shifting a directory's
      shipping date from January 2001 back to December 2000 - without
      falling short $30 million the next year.

      On the other side of the room, Nacchio's face showed strain, annoyance.

      "Listen, this is your problem," he said, elbows planted firmly in his
      armrests. "Be creative. I'm looking to you people to see what it
      takes to get this done. What can you do to get it done?"

      A chill went through some of the QwestDex officials. This was a wild
      man, they thought, and the message they were hearing was
      that the appearance of growth is paramount, that stretching the ethical
      limits is acceptable.

      This was life inside the new Qwest, formed only a few months before in
      a $50 billion merger with Denver telephone giant US West.

      The marriage united Denver-based Qwest, a young, savvy global
      fiber-network firm, with century-old Ma Bell offspring US West, a
      local phone company serving 25 million customers in 14 Western states,
      including Colorado.

      The grand vision: US West's steady revenues would finance Qwest's
      construction of more and more fat fiber-optic lines to pipe
      movies, the Internet and software into homes worldwide.

      But when Qwest draped its banner over the words "US West" atop a
      downtown Denver building, more than a sign changed. (See

      This was a dramatic cultural shift, underscored by the October 2000
      meeting between Nacchio and the QwestDex leaders. Former
      US West executives, traditionalists shaped by strict regulatory
      standards, were now answering to the Qwest new-economy whiz

      The new Qwest was about unbridled dealmaking. The new Qwest was about
      secrecy. The new Qwest was about accounting ploys.

      "Qwest is all about being aggressive," Nacchio told a crowd of US West
      executives gathered in Arizona for a leadership conference.
      "We're going to dominate."

      It all seemed to work for a while.

      The company topped $98 billion in value in July 2000. It employed
      71,000 people. Wall Street swooned for Nacchio, an outspoken
      engineer who was both a visionary and master of the dizzying details of
      the telecommunications world.

      These were the glory days of the dot-com, and telecommunications
      companies were betting on huge demand for their ability to
      swiftly move electronic data. They raced to wire the world with
      fiber-optic lines.

      Stock prices soared for telecom companies even as they lost money.
      Focus on growth, went the mantra of the new economy. And it
      seemed that the demand for bandwidth would grow, grow, grow.

      But a crash was coming.

      Qwest and other companies overbuilt their networks. Demand sagged.
      Businesses failed. Dreams died.

      Half a million jobs disappeared. Trillions in U.S. market value
      vanished. Investors with life savings in Qwest stock were crushed.
      Someone who owned $10,000 in Qwest at its peak in 2000 now owns about
      $737 worth. Even as the industry depression clobbered
      Qwest, Nacchio struggled to portray an ongoing honeymoon resistant to
      the fallout.

      The illusion couldn't last. Stockholders, congressional investigators,
      federal regulators, law enforcement officials and analysts soon
      began questioning the accounting as the firm staggered financially.

      Inside the company, there was panic. Employees were ringing fire bells.
      A flurry of soul-searching was underway. A crisis was
      growing around Nacchio's demands for bigger and bigger numbers.

      Whole leadership teams walked out the door.

      They didn't want to be part of a masquerade.

      "We operated with a belief in the integrity of our revenue reporting,"
      said Steve Young, a former vice president for QwestDex. "Our
      experience told us that any time you puff up the revenue like a giant
      souffle, sooner or later it all rushes back out."

      Nacchio, in sworn congressional testimony this year, said:

      "Neither I nor to my knowledge did any senior manager ever suggest,
      tacitly or expressly, that the company should attempt to
      meet its budget by 'cooking the books."'

      But at that October 2000 meeting with Nacchio, the QwestDex executives
      were worried about the books. And that was before they
      were advised to keep the decision secret.

      US West chief Sol Trujillo walked the corridors of his corporation,
      shaking his head, dropping news of his resignation.

      Qwest and US West had agreed that Trujillo and Nacchio would direct the
      transition process for the companies and become
      co-chairmen of the newly merged powerhouse.

      The deal was billed as a "merger of equals," with Qwest founder and
      largest shareholder Philip Anschutz refereeing disagreements.

      But it wasn't working, Trujillo confided to his managers in spring
      2000. Nacchio had taken control of the merger and had stacked
      the transition process in his favor.

      And Anschutz was letting it happen.

      "This is, unfortunately, the way it's going to be," Trujillo said with
      a round of goodbyes.

      "This" was a hostile takeover. Bit by bit, Nacchio's Qwest team began
      dismantling departments, management teams and policies at
      US West.

      Trujillo, US West's president and chief executive since 1998, was no
      darling inside his firm. Under his watch, US West battled its
      unions and endured a bitter, three-week strike in 1998. The company had
      tried to latch onto the new economy, steering much of its
      investment into products such as high-speed Internet access, while
      basic telephone service languished.

      Still, Trujillo, who had been with the Baby Bell since 1974, knew the
      phone business, and he ensured that his company kept ties to
      the community through charitable donations and sponsorships.

      To US West employees, the bureaucratic Trujillo represented a check on
      the more profane, mercurial Nacchio. But the personalities
      of Trujillo and Nacchio clashed often.

      In March 2000, before the paperwork on the merger was completed,
      Trujillo decided to depart, and he left with more than $71
      million in cash and perks.

      With Trujillo out, Nacchio's law came down: Raise revenue. Spend money.
      Boost the stock.

      And do it fast, fast, fast.

      The Baby Bell in suspenders was gone.

      Qwest was a predator.

      "High energy, speed, winning attitude," that will be the new Qwest,
      Nacchio said.

      Nacchio mastered numbers.

      He studied them, memorized them, spouted them, finessed them. The
      number fixation was his brilliance and his weakness, his
      colleagues and critics say, the reason his company hit or bested the
      targets of Wall Street's predictions 15 straight quarters. In
      speech after speech, he talked about the streak.

      But it also was the reason colleagues often felt uneasy with him, as if
      the numbers kept his foot smashed to the pedal.

      His fixation on boosting Qwest's revenues by 15 percent
      inevitably became everyone's fixation.

      "It was out of control," one former Qwest executive

      Hallmarks of US West, such as support for local
      charities, scholarships and diversity programs, were
      axed or scaled back as Qwest spent heavily to finance
      expansion and improve service.

      In Colorado, where Qwest is based, Nacchio remained
      rootless, living out of a Denver hotel room,
      commuting home to New Jersey on the weekends.

      "I am not sure why being a citizen of Denver would have made a
      difference when Mr. Nacchio was building a global company
      with officers and employees around the world," his attorney, Charles
      Stillman, wrote in response to questions from The
      Denver Post.

      In the telecom world, Nacchio, 51 at the time of the merger, was a

      Analysts and competitors respected the brash Brooklyn, N.Y., native for
      his penetrating intellect and his charm. In his 26
      years at AT&T Corp., he ascended to a much coveted job: head of the
      long-distance giant's consumer division. After AT&T
      passed over Nacchio for its corporate CEO job in 1997, a telecom
      analyst soon suggested to Anschutz that Nacchio was the
      celebrity CEO Qwest needed to grab Wall Street's attention.

      Anschutz lured Nacchio to Qwest with stock options and potential glory,
      and Nacchio set out to use Qwest to dethrone

      Nacchio fashioned his own team out of a desire for gun-blazing growth.

      There was Stephen Jacobsen, Nacchio's protege at AT&T for 14 years,
      whom the CEO installed as Qwest's top sales
      executive. Overly ambitious in the eyes of his peers, Jacobsen made
      sure his employment contract dictated that the board
      consider him for CEO if Nacchio left and that he be paid more than
      anyone other than Nacchio.

      There was Greg Casey, considered the "go-to guy," who could lash
      together huge deals in the last minutes of the financial
      quarter to help the company fulfill its projections. Neither Jacobsen
      nor Casey returned calls seeking comment for this story.

      There was Afshin Mohebbi, an Iranian-born, California-raised engineer
      who had held high-ranking jobs at Pacific Bell, SBC
      Corp. and British Telecom. He took the reins of Qwest's operations,
      minding the operational details.

      Some Qwest colleagues considered the even-keeled Mohebbi the glue that
      bonded Qwest's fractious top management team.

      Others resented his success and central role in decision-making at the
      company. Once, when he was out of the office,
      co-workers even urinated in one of his potted plants.

      The nervousness of the old guard about this radical shift in corporate
      culture was aggravated by Nacchio's occasional barbs
      about telephone service under the former US West. Word spread that,
      during an investment conference weeks after the
      merger, he had called employees "clowns."

      Although Nacchio and a colleague who was there say he never made the
      remark, it became irksome legend within the

      Some workers pasted pictures of Nacchio's face over clown suits,
      tacking them to lunchroom bulletin boards. Others
      scribbled clown faces on notes, sticking them on their computer
      monitors before walking out in a day-long protest.

      "People at US West didn't slack off," said Paula Smith, a veteran
      technical writer who used her US West paycheck and
      company savings for her daughters' college education. "We were hard
      workers, and we couldn't believe what he was saying.
      This was our new boss."

      By June 2000, the merger agreement was finalized.

      A flurry of decrees came down from Nacchio to glean immediate cost
      savings and shift power to corporate headquarters:

      No more talking to the media. No more spending without approval from
      corporate. Most legal, accounting and marketing
      decisions would be made out of headquarters. Raises would be frozen.

      Layoff rumors began circulating.

      "What's going on?" QwestDex employees kept asking Steve Young, head of
      human resources for the publishing division. "Do
      we still have our jobs?"

      "I don't know," Young replied, explaining that he and others were being
      frozen out of the corporate strategy sessions.

      In those late-summer sessions, Nacchio's team was drafting plans to lay
      off thousands of employees.

      While employees of the old US West were jittery, their Qwest leadership
      team was giddy.

      Invited to the 52nd-floor corporate suite to meet Nacchio and his new
      team, U.S. Rep. Diana DeGette, D-Colo., was handed
      a toy water pistol as the executives playfully squirted each other.

      Even before the merger had closed, a fever infected Qwest's ranks: Make
      a deal, and make it big.

      Big deals meant bonuses that could send compensation for managers and
      salesmen of Internet services and other corporate
      products into six figures. Big deals meant avoiding a slide into the
      bottom 10 percent of ranked managers, who were fired
      during rounds of layoffs.

      Big deals kept driving up expectations for the amount of business the
      telecom titan could do, the amount of money it could
      make and spend.

      The fever infected the executive suite, where Qwest president Mohebbi
      nervously watched the clock ticking on the second
      quarter of 2000.

      He knew he was in danger of missing Nacchio's numbers.

      In an e-mail exchange with David Boast, an executive vice president,
      Mohebbi pondered something chancy - a
      multimillion-dollar sale of fiber-optic space, Qwest's core product,
      that was not really available.

      "If we could do this (which I'm not sure we can), then all we have to
      do is get audited, get caught and get screwed!" Boast
      wrote to Mohebbi.

      "I know it is risky," Mohebbi replied. "I will take the fall for it."

      Mohebbi never did that deal.

      The bug infected Qwest sales trenches, where Internet-product
      dealmakers inflated the value of sales by recording all at once
      income projected over the life of their deals.

      The bug infected the wholesale markets and others, where the dealmakers
      frantically traded equipment and capacity on
      Qwest's fiber-optic network. Shareholders and analysts eventually said
      the deals served no cause other than to help Qwest -
      and, sometimes, the deal partners - achieve financial targets.

      A pattern emerged. Creative accounting and other questionable moves
      dramatically jacked up revenue in the short term.
      Employees plunged into a desperate cycle of seeking bigger and bigger
      deals to beat the last quarter's misleading deals.

      "Near the end of quarters I was beat up by 20 different managers," said
      one salesman of Internet products. "They would say,
      'Where's the deal, where's the deal?' The message was. 'We're going to
      grow, grow, grow.' But an awful lot of deals were
      being (recorded), and no revenue actually was being generated."

      In the telecom industry, Qwest moved like a shark.

      Ultimately, it would devour or dominate archrival AT&T, Nacchio

      Across Colorado, across the country, trains equipped with special
      trench-cutters sliced through thousands of miles alongside
      existing railroad tracks, dropping in fiber lines to expand Qwest's
      25,000-mile network, the backbone of its multistate
      business. Networks expanded to Los Angeles, Washington, D.C., and New
      York. The cost was high, sometimes $800,000 a

      At the same time, Qwest spent heavily to fix customer-service problems
      that had haunted US West.

      Local phone networks were beefed up. Hundreds of new field technicians
      were hired. Internet investments were increased.

      But at what price?

      The spending ultimately ballooned Qwest's debt by 47 percent, from
      $18.1 billion at the merger's completion in 2000 to
      $26.6 billion by 2002.

      All told, Qwest spent $17.5 billion in 2000 and 2001, with the largest
      portion of the tab going to upgrade and expand the
      company's local phone network and global, fiber-optic network.

      Even as the economy began to falter in 2001 and demand for telecom
      services waned, the company's capital spending topped
      out at $8.5 billion - equal to 45 percent of Qwest's revenue, roughly
      twice the norm for Baby Bells.

      Few disputed the benefit of Qwest's aggressive spending. The frenzy was
      on industrywide to lay more and more fiber. And
      Qwest did improve phone service, reducing the number of complaints and
      the amount of fines it had to pay.

      "The one peculiar thing about Qwest in the aftermath is everyone hating
      it, dumping on it and singling out all of these things, but
      the one thing that dramatically improved from US West to Qwest was
      overall service quality," said Raymond Gifford,
      chairman of the Colorado Public Utilities Commission.

      Even so, some inside Qwest wondered if the company was spending too
      much too quickly.

      "They gave people blank checkbooks," one Qwest executive recalled.
      "Joe's attitude was, 'Whatever the local network
      needs, it gets.' You can look at that as a good thing. But in the hands
      of people who don't know what they're doing, it's a bad

      While Nacchio professed publicly in 2001 that Qwest was more resistant
      to the economic slump than its peers, insiders saw
      clues indicating otherwise.

      "We were starting to see a downturn in orders (for phone service), so
      we knew the economy was hurting us," said John
      Thompson, vice president of Communications Workers of America District
      7, which represents 30,000 Qwest field workers.
      "People were struggling to fill their day. ... (Qwest) was spending
      money they could have spent later."

      Still, Qwest's bold growth forecasts were in line with expectations of
      Wall Street, investment banks and much of the
      telecommunications industry.

      From 1997 to 2001, North American telecom companies gorged on roughly
      $90 billion they raised from high-yield bonds -
      also called junk bonds - to support their expansions, according to
      Moody's Investors Service.

      "If you were comfortable with those growth rates," one former Qwest
      executive said, "the (Qwest) numbers seemed

      Just months after the merger, in October 2000, members of Qwest's audit
      committee learned that some of those numbers
      weren't reasonable.

      The committee, made up of four of the board's 14 members, serves as the
      financial watchdog for the board.

      Arthur Andersen's accountants told the committee that the Securities
      and Exchange Commission was questioning how telecom
      companies booked some sales of space on their fiber-optic networks.

      The company had been recording those revenues as immediate gains, even
      though most of the sales were long-term leases,
      sometimes covering 20 years.

      Qwest had been particularly aggressive in doing that, congressional
      testimony later showed.

      "(The SEC) is vigorously challenging sales treatment," Andersen noted
      in an October 2000 report to the committee members.
      The accountants were referring to the SEC's critiques of Qwest
      competitor Global Crossing and its accounting methods. The
      implication was that the SEC could scrutinize Qwest, as well.

      Though Andersen advised the company that the treatment was a "key
      risk," it did not advise it to stop the practice.

      To Lynn Turner, chief accountant at the SEC from 1998 to 2001,
      Andersen's advice to Qwest illustrated the ineffectual audit
      work that marred much of the late 1990s and 2000.

      "Time and time again at the SEC, we found where the auditors actually
      found the problems during the audit but then failed to
      require management to fix the numbers," Turner said. "It appears these
      are all such big clients to these audit firms that, in all
      too many cases, they are just never going to say no."

      The yellow-pages division was the pride of US West's corporate family,
      a reason to light up cigars every year.

      During the '90s, the division led the industry in revenue growth every
      year except one, often topping $1 billion annually, and its
      leaders won the biggest awards handed out by the Yellow Pages
      Publishers Association.

      They championed diversity and community-outreach projects. And they
      practically obsessed over measuring customer and
      employee satisfaction, workers say.

      So when Nacchio's team burst in, they shuddered.

      Immediately, it seemed to them, Nacchio was feeding years of success
      into the shredder.

      And, in their view, it only got worse. Over the next few months, they
      were ordered to ease credit and other requirements for
      advertisers and cut staffing. And they were asked to conceal
      questionable accounting maneuvers.

      Nacchio wouldn't respond to questions from The Post regarding Dex,
      citing numerous investigations underway. Speaking
      generally, Nacchio told Congress he insisted on "the highest level of
      ethics" and never advocated stretching legal and ethical

      To meet QwestDex's new revenue targets, Nacchio directed the division
      to shift the publication schedule for phone books,
      QwestDex leaders said.

      For example, the Colorado Springs edition was shifted from a January
      2001 delivery date back to December 2000, allowing
      Qwest to book more than $30 million in revenue, dramatically boosting
      revenues for 2000. (Under Qwest's accounting rules,
      a phone book's total annual revenue was booked the month it hit the

      "We were counting the book twice in one year," a former vice president

      Most of the QwestDex leadership team, including vice presidents Carol
      Johnson, Linda Latenser, JoLynne Whiting and Steve
      Young, immediately saw this as a manipulation with no sound business
      reason, their colleagues said.

      They began asking Qwest attorneys whether it was proper and legal.

      The lawyers' response: as long as the changes are disclosed in
      financial reports.

      But the disclosure was out of their hands - that was corporate's
      responsibility. And it also didn't address how such a move
      would be explained to employees and customers. Or how it would be
      viewed in the industry. Or how to plug the $30 million
      revenue hole left in 2001.

      Several appeals to Nacchio himself - including the October meeting with
      the QwestDex team - fell flat.

      "If it takes a schedule change to meet your target this year, then
      that's what it takes, but there will be no forgiveness (on
      revenue targets) in the next quarter," a former QwestDex manager quoted
      Nacchio as saying.

      Qwest's chief financial officers during that period - Robert Woodruff
      and Robin Szeliga - supported the schedule changes in
      meetings with the QwestDex leaders, company managers said.

      QwestDex's executives were dismayed, deflated.

      "There was no business reason to this at all," one manager said. "We
      began wondering, are we caught up in a fraud?"

      Concerns grew even more in early 2001, when employees learned of
      additional plans to change schedules for other phone
      books, adding or subtracting a month to log bigger revenue gains. Yet,
      in some cases the company paid to store the books for
      weeks while they juggled the schedules.

      "Customers were promised the most timely publication possible," a
      former QwestDex employee said. "But here they were
      sitting in trucks or warehouses. The question is: Was there any other
      plausible reason for doing this other than manipulating the
      financials? The answer is no."

      Salespeople were in a quandary and felt blindsided and confused by the
      changes, said union spokesman Lew Ellingson.

      "The salespeople had built these relationships with customers," he
      said. "Without notice, strangely these schedules get

      In March 2001, as Qwest shares slid to the $30 range, the
      public-relations department sent out a secret memo to managers.

      It described how changes in the yellow-pages' book schedules were part
      of a new, more urgent Qwest emphasis on meeting
      financial targets.

      It instructed them to try to hide the altering of schedules.

      "Keep the changes in directory schedules invisible and low-key with
      employees," the memo stated. "No written

      As Qwest spent bundles, Nacchio and other executives were making

      "If the company grows, we get richer," was the mantra across the
      company, the theme of sales conferences and rallies.

      To attract executives to Qwest in its fledgling days, the company
      relied on stock options, a perk popularized in an industry
      elevating CEOs to superstar free-agent status.

      Many executives accepted lower base salaries to move to Qwest, but the
      stock options made up for it as Qwest's stock
      soared above its $5.50 debut in 1997.

      From 1997 to 2001, Qwest insiders reaped twice as much cumulative
      profit from selling Qwest stock - $640 million - as
      every other telecom firm in its league except for Global Crossing.

      In addition, Qwest founder Anschutz made $1.85 billion from selling
      Qwest stock in three deals in 1998 and 1999. His
      biggest sale was forced by BellSouth as part of its agreement to buy 10
      percent of Qwest.

      Nacchio cashed in stock for $250 million - $93 million in 2000 alone.
      He said he wanted to diversify his investments and had
      to use his 1997 stock options within five years or lose them.

      Qwest's top executives found other ways to expand their wealth outside
      their company-awarded perks: Pulling in handsome
      stock-option awards from small companies from which they bought
      equipment or sat on technical-advisory boards.

      Although the practice is legal and commonplace, some shareholders and
      critics in the company questioned whether the perks
      could influence business decisions.

      Qwest and other companies eventually limited such deals.

      By the time the company's annual meeting rolled around in May 2001, the
      stock was still parked in the $30s.

      The company had wowed analysts with its first-quarter financial
      results, causing independent telecom analyst Jeff Kagan to
      remark, "Qwest is where companies like AT&T and WorldCom are trying to
      get to."

      But at a shareholder meeting, Nacchio and board members were pelted
      with criticisms about their salaries and perks.

      Nacchio was unapologetic.

      "I know they are big numbers, but I'm neither apologizing for it nor am
      I embarrassed for it," Nacchio told reporters before
      the meeting. "It's the way it works when you're successful in a

      "I should make more money than a second baseman," the CEO continued,
      adding that he creates "more economic value than
      they do."

      When Qwest's 2000 annual report was filed with the SEC in spring 2001,
      it bragged about a big bump in revenue. It did not
      disclose the accounting gimmicks that helped that happen.

      "Directory services revenues for 2000 increased by almost $100 million
      due principally to higher advertising rates, an increase
      in the number of directories published ..." read page 6.

      A sense of fear and unease began moving more strongly through the

      Floor by floor, the offices of human resources, internal auditing and
      legal counsel became turnstiles for employees concerned
      about their jobs and the ethics of the company.

      Union leader Ellingson recalled Qwest lawyers reassuring employees
      "that they were doing everything legal and legitimate. But
      there were people leaving who did not like to do business this way."

      By the end of spring 2001, most of the QwestDex leadership team, the
      brain trust that helped build the division under US
      West, had quit. They left careers they loved because they felt their
      concerns were continually rebuffed and their colleagues
      were being laid off.

      Even union officials lobbied some of the QwestDex bosses to stay.
      "Please reconsider," Ellingson implored vice presidents
      Carol Johnson and Linda Latenser.

      He said they told him they couldn't stay on because they were troubled
      by the company's conduct and direction.

      Not until spring 2002, about a year later, were specifics about the
      Colorado Springs directory revealed to investors and the

      The disclosure came when QwestDex was being groomed for a sale to keep
      the company's finances alive.

      By then, doubts about Qwest had spread from the company to outsiders,
      including a trio of nosy Wall Street analysts.
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