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« Book Review | Main | It Really Is All One War »

Qwest For Hell

Having gone through Deals From Hell, I thought it might be fun to start applying its lessons. And where better to start than with two delightful examples from right here in Denver: the Qwest-US West merger, and Qwest's proposed purchase of MCI.

First, here are the main criteria for failure:

  1. Destruction of Market Value
  2. Financial Instability
  3. Impaired Strategic Position
  4. Organizational Weakness
  5. Damaged Reputation
  6. Violation of Ethical Norms and Laws

For Qwest-US West, we have, let's see, check, check, check, check, check, and, uh, yeah, check. Qwest was very quickly worth less than the two companies had been separately, with large, unmanageable debt, an inability to compete, seen as an undesirable business partner, with fleeing executives, some of them fleeing the law.

Now, let's look at the causes of failure:

  1. Excessive complexity
  2. Limited flexibility
  3. Poor management choices
  4. Cognitive bias leading to overoptimism
  5. Business not as usual
  6. Breakdown in the management team

Once again, they hit for the cycle. Having bought a company at a time of great - ferment - (5), Qwest found itself with limited ability to respond. They completely underestimated the difficulty in reworking US West's famously bad customer service (4), had no idea what was involved in running a local phone network, which is substantially different from a long-distance network (1). They clearly overpaid for US West - take a look at the goodwill writeoff they had to take, leaving them with too few resources on this forced march to integration (2). The company changed direction any number of times (3), and finally, the two cultures never really meshed. Qwest had a reputation as a high-flying, fast-moving risk-taker living on the edge. What do you think a Baby Bell management team looked like? (6)

This deal was a train wreck from Day 1, and the company has never really recovered, even years later.

Now, by applying the list of warning signs, it should be obvious why the Qwest-MCI deal was a bad idea to start with, and be relieved that it didn't come to pass.

First, what they did right. MCI was certainly in a complementary business to Qwest. It wasn't as though they were trying to enter a completely new market or business. They did have a strategic reason for wanting MCI.

Now, what they did wrong. First, the buyer was looking for the seller to transform their own business. Second, they weren't very creative in structuring the deal. And third, the got into a bidding war in a hot market. No, the overall market wasn't hot, but telecom was seeing a whole lot o' mergin' going on, and lots of weaker companies were getting bought.

The three points flow from one to another. Qwest was not a strong company, and was looking to improve itself rather than the seller. Since it didn't have any cash, its offer was entirely in stock, with no earnout, to a set of owners who were clearly looking to exit the business. (Bruner flags all three of these as warning signs.) As it got into a bidding war with Verizon, and its stock price fell, it had nothing to offer but progressively larger slices of itself. That slowly rising precentage eventually approached majority control, which would have governance as well as tax consequences.

Next step: evaluating deals when they're announced, which is only one teeny-weeny baby step away from making predictions.

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Power, Faith, and Fantasy

Six Days of War

An Army of Davids

Learning to Read Midrash

Size Matters

Deals From Hell

A War Like No Other


A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud