IP: fascinating -- Old friends complicate Buffett's foray into telecom

[Dave Farber <dave () farber net>]

[ "Buffett's investment could set in motion a complex web of relationships
and ‹ if you play it all out in just the right way ‹ put Bill Gates in
charge of every fiber-optic line in the USA. " Shades of Snowcrash djf]


Old friends complicate Buffett's foray into telecom

The telecommunications industry truly ought to be made into a soap opera.
Maybe we could call it General Telecom. No? How about As the WorldCom Turns?
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The Young and the Bankrupt?

Monday, super investor Warren Buffett jolted the nearly prostrate telecom
industry by leading an investment of $500 million in Level 3 Communications.
Telecom companies now are so reviled, and Buffett is so worshiped, the
investment is like the prom queen deciding to dance with the greasy kid who
broke both legs of the star quarterback by accidentally running him over in
the school parking lot before the first game.

Beyond the surface, the potential intrigue could get fascinating. This is
where the soap opera aspects come in. Buffett's investment could set in
motion a complex web of relationships and ‹ if you play it all out in just
the right way ‹ put Bill Gates in charge of every fiber-optic line in the
USA.

This stuff is layered on top of Monday's congressional hearings, during
which new WorldCom management threw tomatoes at old WorldCom management,
which liked Level 3's founder and CEO, James Crowe, about as much as
homeowners like termites.

Let's start with Buffett.

Buffett has known Crowe, for a long time. They have mutual ties through
Walter Scott, CEO of construction giant Peter Kiewit Sons'. Scott is the
founding investor in Level 3. Scott and Buffett are Omaha billionaires,
which is a small club, and longtime friends. Buffett's offices are on a
floor of Kiewit's Omaha headquarters. When Level 3 started, it leased space
there, too.

A few months ago, Crowe says, the three well-acquainted men ‹ Crowe, Scott
and Buffett ‹ met to talk about opportunities in telecom. They figured there
must be opportunities now that things are so bad that entire telecom
companies will probably be sold on eBay.

"We asked Mr. Buffett if he'd be interested in investing in Level 3," Crowe
says. Buffett said yes, and pulled in two partners. But why now? Do Buffett
and Crowe think telecom has bottomed out? "All of us need to make statements
about the future with great humility," Crowe says. "But signs say it's not
going to get much better soon, but it's not going to get any worse."

What will Crowe do with the $500 million? He's NOT looking to buy
fiber-optic networks on the cheap. Crowe's priority is to buy customer
bases, which means buying companies or pieces of companies that serve end
users. Level 3 would then move that traffic on its long-haul fiber-optic
network to make use of Level 3's excess capacity. Crowe didn't say so, but
if WorldCom spirals into insolvency, pieces of WorldCom might fit perfectly
into Crowe's shopping basket.

This is where the tangled relationships come in.

In 1989, Scott funded Crowe's first company, MFS Communications, which
provided telephone connections to businesses. In 1995, Buffett, Scott and
some friends were on a retreat in Ireland. They invited Gates, who told the
others about the Internet. Once back in Omaha, Scott told Crowe that MFS
needed to own the more modern networks that carry the Internet.

MFS decided to buy Internet carrier UUNet, run by John Sidgmore. Microsoft
owned 14.7% of UUNet. Gates told Crowe he'd sell if Crowe promised to keep
Sidgmore. Crowe agreed. The deal was done. Sidgmore owed Gates a favor.

Only months later, WorldCom, led by Bernie Ebbers, bought MFS for $14
billion, making Crowe, Scott and Sidgmore wealthy.

Three weeks after the deal closed, Crowe, not wanting to work for Ebbers,
abruptly quit WorldCom and went back to Omaha. Sidgmore stayed, and Sidgmore
and WorldCom's recently fired CFO, Scott Sullivan, became Ebbers' deputy
dealmakers.

Crowe joined the board of a new fiber-based carrier, Joe Nacchio's Qwest
Communications. Not long after, Crowe decided the Internet was still a huge
opportunity. He quit Qwest's board, got $3 billion in funding from Scott's
Kiewit, and started Level 3, a Qwest competitor. Nacchio, understandably,
was teed off at Crowe.

To start Level 3, Crowe recruited 18 of his top former MFS executives out of
WorldCom. Ebbers got teed off at Crowe, too.

With me so far?

A couple of years ago, Sidgmore cut a deal for WorldCom to buy Nextel, but
Ebbers nixed the deal an hour before it was to close. Gates' Microsoft owned
about 5% of Nextel. Sidgmore was mad at Ebbers and quit his day-to-day job
at WorldCom. Gates was probably mad at Ebbers, too.

Then last month, Sullivan admitted to improperly accounting for WorldCom
expenses. Sidgmore took charge of WorldCom, fired Sullivan, and took shots
at Ebbers for messing up WorldCom, though Sidgmore told me he'd still call
Ebbers "a friend."

Qwest is crashing, too, and Nacchio was punted from his CEO job.

So Crowe has $500 million from investors led by Buffett, who is one of
Gates' closest friends. Now for the speculation:

Depending on how things go for WorldCom, perhaps Sidgmore, as a return favor
to Gates and a snub of Ebbers, would sell part or all of WorldCom to Ebbers'
enemy Crowe, who runs the company backed by Gates' friend Buffett.

With that, Crowe and Sidgmore would both kick Ebbers in the heinie. Then,
with the added cash flow from WorldCom customers, Crowe could buy a
distressed Qwest, thereby shooting a raspberry at Nacchio.

The combined LevelWorldQwest could drive AT&T into insolvency, then Crowe
could buy that company, too. The Omaha boys ‹ Crowe, Scott and Buffett ‹
would own a near-monopoly in U.S. long-haul fiber networks.

Gates could approach Buffett to buy it all. Gates would own the Internet.
Gates could unilaterally rename the telecom soap opera, All My Fibers.

Checkmate.
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Kevin Maney writes a weekly column about technology. Send e-mail to Kevin at
kmaney () usatoday com.


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