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Qwest's MCI Bid Born of Need to Expand Its Base

"That's a primary driver for them," said Nancy Kaplan, vice president at Adventis Corp., a consulting firm. "That's a critical issue for them because they're in a difficult situation."

Also, MCI has more than 60,000 business and government customers, which account for nearly half the company's revenue. Qwest has a smaller corporate customer roster despite spending more than $20 billion to build a 155,000-mile high-capacity system across the county. Without a foothold in wireless or television service, Qwest needs the added size and significance of MCI's customers to grow beyond its base in 14 Western states, analysts said.


Qwest CEO Richard Notebaert said buying MCI could result in $15 billion in savings. (David Zalubowski -- AP)

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Some Shareholders Criticize MCI Decision (The Washington Post, Apr 7, 2005)
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"This is their last opportunity to dramatically increase the size of their company" and compete with the telecommunications giants such as Verizon and SBC Communications Inc., said Brett Azuma, executive vice president of research at RHK Inc., a South San Francisco-based research firm. "Otherwise, they sit by themselves. Qwest is a non-factor outside of their current region."

Qwest is a product of the Internet boom of the late 1990s, when a surge in growth in Internet use and e-commerce spurred companies to build huge networks of fiber-optic cable that could carry huge loads of information in a split second.

Many of those companies were forced to file for bankruptcy protection when the predicted demand never materialized and financing dried up when the tech bubble burst. Many on Wall Street expected Qwest to meet a similar fate: In 2002, it carried $26.3 billion in debt, which meant monthly interest payments of nearly $150 million.

To avoid a Chapter 11 reorganization, Qwest began to sell parts of its business, including the company's highly profitable Dex directory business for $7 billion.

But many regard its real savior to be US West, the local telephone company. When Qwest bought it, US West was in the relatively prosaic business of selling local telephone services to 25 million residential customers. It was profitable, but its strategy looked unsexy and unexciting next to Qwest's, which was new, risky and bold.

Yet US West became the financial life raft for a rapidly sinking Qwest, giving it just enough cushion to avoid bankruptcy.

The financial struggle took its toll in other ways. In June 2002, Qwest ousted Nacchio, who by then was under investigation for allegedly manipulating company accounting to inflate Qwest's revenue. (Last month, the Securities and Exchange Commission charged Nacchio and six other former Qwest executives with inflating revenue, after Qwest agreed to pay $250 million to settle its case with the regulators in October.)

The combined company, which once employed 64,000 people, also had to cut operations and now has about 40,000 employees.


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