A Telecom Con-Qwest for Private Equity?

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A Repaired Reputation

If the company isn't destined to be acquired, then it's still well on the way to resurrecting its past as a reliable dividend-paying telecom utility stock, Barden says. For now, the company is using excess cash to repurchase shares on the open market (see BusinessWeek.com, 4/13/07, "Private Equity Targets Telecom").

During Notebaert's tenure, Qwest's share price has more than doubled, surprising skeptics on Wall Street who more or less left the company for dead in the wreckage of the telecom market's post-bubble collapse. Many analysts expected the company to skid into bankruptcy or be acquired by one of its stronger rivals. Instead, Notebaert slashed costs, paid down debt, and then launched an audacious hostile takeover bid for MCI that Qwest ultimately lost to Verizon (VZ) (see BusinessWeek.com, 5/16/05, "One Big Qwestion Mark").

Despite that defeat, Qwest built new credibility on Wall Street during the process and investors took notice—some even provided the financial backing to help Qwest mount a bidding war against Verizon.

Notebaert's Success and His Successor's Challenge

The stock's rebound has brought big personal gain to Notebaert as well, though he recently donated a chunk of that to charity. He currently holds $38 million worth in vested shares and stock options awarded to him by the company. That's after exercising 3,875,000 stock options in November, selling those shares for a profit of roughly $18.5 million, the after-tax proceeds of which are to be donated. He also announced in May he was donating 58,000 shares of stock, worth more than $550,000 at the time.

There's no doubt that Notebaert's successor will take the helm in a more uncertain environment than ever for traditional telecommunications companies. Cable TV companies have lured millions of residential customers away from AT&T, Verizon, and Qwest by introducing phone service using Voice-over-Internet Protocol, or VoIP, technology. Millions more have gone all-cellular or switched to standalone VoIP providers like Vonage (VG) and eBay's Skype (EBAY). While AT&T and Verizon are responding with multibillion-dollar investments in network upgrades that can deliver cable TV, Qwest has chosen to hold off on the major capital expenditures it would take to enter the television business. Denver-based Qwest also doesn't own a cell-phone business like its bigger rivals, though it does resell Sprint's (S) wireless service under its own brand name.

"Cable's presence is being felt among all wireline companies, but it has proven far from catastrophic to the cash streams of these companies," Bank of America's Barden wrote last month in upgrading Qwest.

Meyerson is Deputy Technology Editor for BusinessWeek.com.