Qwest telecommunications management performance and recovery assessment

Organizational Assessment - Qwest

Qwest (Q: N) is a telecommunications provided based in the Western U.S.. The firm began in 1996 by installing digital fiber optic lines along the railway corridor of the Southern Pacific Railroad. They merged in 2000 with U.S. West, a Baby Bell, with the resulting company being a more full-service telecom provider. During this time the company became involved in a handful of scandals including one for slamming and one for accounting issues.

Qwest's management team during the era of scandal was roundly criticized by the SEC and several executives faced criminal proceedings. Since then, the company has attempted to turn itself around. They have worked to improve shareholder value, stabilize their stock price, and improve customer service. They have been forced to do this will undertaking significant cost-cutting measures, including the release of thousands of employees.

In 2007, Qwest introduced several new executives. The purpose of this paper is to gain some insight into the performance of previous regimes at Qwest and attempt to gauge the ability of the current regime to deliver sound management practices that meet the needs of all of Qwest's stakeholders.

Performance

Qwest's performance over the past several years has been generally poor, although there have been some signs of recent improvement. The company is saddled with massive debt, with a debt-to-equity ratio of 2528. They are able to meet their obligations, but not at a comfortable level. Their quick and current ratios are trail the industry, sector and the S&P 500 overall. They were recently fined by the SEC, and the fine was split into two portions due to Qwest's poor cash position. The weak cash situation has also resulted in a decline in the company's capital spending over the past five years.

One of management's key responsibilities is to increase shareholder value. Qwest's stock over the past five years has failed to make progress. Growth in share price was experienced in 2006 and 2007, but thus far in 2008 the price has fallen to the point where it is lower than it was five years ago. Qwest's pays a dividend with a yield of 8.2%, much higher than the industry average, but this is reflective of the consistent erosion in shareholder equity over the past year.

The relative instability in share price is consistent with poor management. The industry in which Qwest operates is relatively mature, and stable. New technology has increased volatility in recent years, but the fundamental nature of the industry is that once the infrastructure is in place, cash flows are generated. There is a degree of competition, due to deregulation that eliminated the competitive advantage that infrastructure gave the telecoms. But Qwest's volatility (beta 1.97 versus an industry average of 0.68) can be traced to accounting scandals and the inability to management to generate the profits that their peers in other telecoms have been able to generate.

Qwest has shown recent improvement in their margins. The industry is characterized by high gross margins, which cover the cost of infrastructure buildup and maintenance. Thus, operating margins are significantly lower. Over the past five years, Qwest's margins have consistently trailed the sector. More telling is that the gross margin has been fairly close to the sector average (58.33% to 59.13%) over the past five years, the other margins that lie downstream have not held close to the sector average. This is evidence of weaknesses in Qwest's management team because while they are starting almost on a par with the rest of their competitors, those competitors outperform once fixed costs, interest and taxes are taken into consideration. In an industry where infrastructure (a fixed cost) is one of the most important cost drivers, the ability to manage fixed costs is one of the most important areas of focus for management.

The company's inability to deliver consistent profits has resulted in poor managerial efficiency ratios. The five-year return on assets is -0.30% versus the sector's 7.03%; the return on investment is -0.37% versus the sector's 9.72%. Qwest has been unable to register a return on equity because the company's equity has been negative until recently.

In the past year, Qwest has improved its financial situation. They have returns on assets and investment superior to their peers. Q has equity now, the result of five years of consistent reductions in its liabilities. Assets have also been reduced over this period, at a greater rate, and this reduction is largely attributable to accumulated depreciation. Exclusive of depreciation, Qwest's assets have increased by $2.2 billion.

Ethical Challenges

In 2004, Qwest settled with the Securities & Exchange Commission to pay a $250 million fine over a three-year fraud investigation. The commission's characterization of the organizational culture at Qwest was unusually scathing. They described a ' "continuous pattern" of misleading the public and investors about its true financial condition.'

The culture was labeled as ' "addicted" to making the numbers like someone is addicted to heroin." The crisis crippled Qwest financially. The company's risk level became so high that its debt was junk status, unusual for a telecom of its size. The stock price was depressed because the charges were so serious that the fine was actually expected to be much higher than it was. Compounding the issue further was the reality that even at a depressed stock price, Qwest was an unsuitable takeover target due to poor management and an inflated payroll.

Since the SEC fine, Qwest has addressed the issue by rebuilding its executive team. The majority of its board of directors have joined Qwest since 2004, and most of the senior executive joined the company last year. This includes the key positions, relating to the accounting scandal, of Chief Accounting Officer and Chief Financial Officer. CEO Edward Mueller is also a recent addition to Qwest.

It is hoped that this new leadership team will be able to carry Qwest forward in a manner entirely unlike that of the previous regime. The new board will hopefully mark an era of dramatically improved corporate governance.

Conclusion

Qwest has faced a challenging eight years since it acquired U.S. West. Post-merger, the company built a legacy of poor governance, fraud, scandal, massive layoffs and overall poor performance. There were few positives that could be drawn toward the company's ability to meet the needs of its stakeholders. Former CEO Joseph Nacchio and six other executives of that era faced criminal proceedings. Nacchio was convicted, though that conviction has now been overturned and a retrial scheduled.

Since the settlement with the SEC in 2004, Qwest has worked to turn itself around. They have slowly instilled a new organizational culture. They were able to restructure their workforce, resulting in dramatic job loss while still maintaining the support of the union.

Shareholder value, while still low today, has been steadily increasing over the past several years. The company returned margins and returns in 2007 that were superior to the industry averages, something they had not been able to do previously.

The improvement process is ongoing. Shareholder value has increased but the stock price has eroded steadily over the past year. Qwest still holds so much debt that they are unable to finance any major infrastructure projects., and they are still cutting employees, albeit at a much slower rate than in past.

It would be premature to form an opinion on the new management team, who have had less than a year with the company. However, there are signs that Qwest's performance has improved of late, and that the company will continue on the path of improvement in the coming years.

Sources:

Financial statements, ratios and share price information from Reuters. Retrieved June 27, 2008 at http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=ANN&symbol=Q.N

Bryer, Amy. (2004). With SEC Scrutiny Over, What Next for Qwest? Denver Business Journal. Retrieved June 26, 2008 at http://www.bizjournals.com/denver/stories/2004/10/25/story7.html

Reardon, Marguerite. (2008) a Qwest for Survival. CNet. Retrieved June 27, 2008 at http://news.cnet.com/a-Qwest-for-survival/2008-1034_3-6232125.html

No author. (2007). Qwest Communications Tops List in the 2007 American Customer Satisfaction Index Survey. BusinessWire. Retrieved June 27, 2008 at http://www.allbusiness.com/services/business-services/4344424-1.html

Vuong, Andy. (2007). New Qwest CEO Greets Anxious Employees. Denver Post. Retrieved June 27, 2008 at http://www.denverpost.com/telecom/ci_6612499

Vuong, Andy. (2008). Nacchio Conviction Overturned. Denver Post. Retrieved June 27, 2008 at http://www.denverpost.com/business/ci_8603419

Bryer, Amy. (2004). With SEC Scrutiny Over, What Next for Qwest? Denver Business Journal.

Reardon, Marguerite. (2008) a Qwest for Survival. CNet.

No author. (2007). Qwest Communications Tops List in the 2007 American Customer Satisfaction Index Survey. BusinessWire.

Vuong, Andy. (2008). Nacchio Conviction Overturned. Denver Post.