Quest for MCI 'over'
Notebaert says no to new bid, looks ahead to other goals

By Jeff Smith, Rocky Mountain News
Wednesday, May 25, 2005

Qwest Chief Executive Dick Notebaert squelched speculation about a renewed bid for MCI, telling shareholders Tuesday the Denver telco's pursuit of the long-distance carrier has ended.

"We're not looking at MCI; that's over," Notebaert said.  He instead indicated the 40,000-employee company with $13 billion of annual revenues is plowing ahead with a new Plan A that could include acquisitions of smaller companies or other assets.
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In a relatively low-key annual meeting, held in the Seawell Grand Ballroom at the Denver Center for the Performing Arts and attended by roughly 200 people, shareholders tread softly on Qwest's failed $9.75 billion bid for MCI.  But, as in previous years, several pounded away on corporate governance, excessive executive compensation and static retiree benefits.

Stockholders owning 35 percent of Qwest shares voted in favor of stricter guidelines for director independence.  That was up from 25 percent last year.

Nearly one-third voted for a policy to seize executive bonuses if Qwest has to restate its financial results again in the future.  Qwest erased more than $2.5 billion of revenues from its 2000 and 2001 books because of accounting misdeeds.

And holders of more than 20 percent of Qwest shares withheld their support to re-elect director Cannon Harvey, president of The Anschutz Co.

The vote was symbolic in Harvey's case, as he ran unopposed, and he declined to comment on the vote.  For the other shareholder proposals, the votes weren't high enough to change the status quo.

But the results nevertheless illustrated many shareholders still hold Qwest's board accountable for the financial scandal under former CEO Joe Nacchio.

Colorado billionaire Phil Anschutz founded Qwest, and, until recently, he and his associates had three spots on the telco's board.  Notebaert said Anschutz was on the West Coast and couldn't attend the meeting.

Separately, Craig Slater, president of The Anschutz Investment Co., recently decided to step down from Qwest's board.  Notebaert praised Slater for his contribution to Qwest as a confidante and adviser.

Notebaert, in a subdued tone, indicated Qwest has started life after MCI, looking at other opportunities including possible acquisitions of smaller companies or assets that will be divested as the result of the mammoth mergers of Verizon-MCI and SBC-AT&T.

He said he took "great pride" in what Qwest accomplished during its pursuit for MCI and of course is disappointed.

"Frankly, we felt from day one it was skewed against us," he said.

Notebaert said he felt pride because three years ago a lot of people expected Qwest to "raise the white flag."  But today, the company's reputation has soared because of the effort to buy MCI, he said.

"We have been deemed by virtually everyone, especially within our industry, to be a strong, viable player," Notebaert said, "and we received accolades even from our competitors on the way we handled the MCI acquisition process."

While many agree Qwest's reputation was bolstered within its region and among employees and retirees, others are more mixed about how much public relations mileage Qwest ultimately gained.  At times, some analysts portrayed Qwest as a hopeless romantic.

Mimi Hull, president of the Association of U S West Retirees, said after the meeting that she has confidence Qwest does have a plan.  She said she understood why Notebaert couldn't be more specific.

But she also saw someone still hurting from losing MCI.

"I think there's wounding there," Hull said.

Notebaert has left the door open on the outside chance MCI stockholders reject Verizon's $8.45 billion offer later this summer.

One 82-year-old stockholder told Notebaert she was discouraged Qwest's stock remained stuck at the $3-a-share level, noting that "at my age I can't do too much to earn a living."

Notebaert empathized with her, saying his 84-year-old mother, who also bought Qwest stock, "is not as kind when she calls me.  Would I like the stock to be much higher?  You betcha."

But he told stockholders how close Qwest was to the "precipice" in 2002 and how much it has accomplished since then, such as cutting costs and debt, improving profit margins and selling high-speed Internet services.

Hull expressed concern that Qwest is paying the legal bills of former executives such as Nacchio, who has been sued by the Securities and Exchange Commission for alleged fraud.  Nacchio has denied the allegations.

Qwest chief legal officer Richard Baer said Qwest by law is required to advance such legal fees but also can seek to recover those fees should the SEC prove its case against the executives.  He wouldn't disclose how much Qwest has spent.

Insurance money also is paying for part of the former executives' legal fees, Notebaert said.

Hull and stockholder activist Gerald Armstrong said after the meeting that the lingering effects of the telco's accounting scandal point to the need to finish cleaning house of the directors who were on the board then.

"Anyone part of Nacchio's team doesn't deserve" to remain on the board, Hull said.

Shareholder decisions at Qwest's annual meeting

RE-ELECTED DIRECTORS

  Dick Notebaert, chairman/CEO, 97.6 percent

  Linda Alvarado, president of Alvarado Construction Co., 97 percent

  Cannon Harvey, president of The Anschutz Co., 76.4 percent.

REJECTED THREE SHAREHOLDER PROPOSALS:

  Tougher guidelines for director independence (63.7 percent against, 35 percent for)

  Shareholder approval of extraordinary retirement benefits for senior executives (81.2 percent against, 17.8 percent for)

  Pursue executive bonuses if company restates financial results (67.2 percent against, 31.7 percent for)

Source: Qwest, Preliminary Results

Qwest
Q: NYSE
$3.78
+ 11 cents

MCI Inc.
MCIP: Nasdaq
$25.59
- 32 cents