When Notebaert became president and CEO of Ameritech in January 1994, he took charge of a company that had 12 million local phone customers, 2.5 million cellular customers, and $14.9 billion in annual revenue. Notebaert wanted Ameritech to have a share in the long-distance phone call market, but a court ruling and government regulators, both federal and state, forbade the Baby Bell from selling long-distance services where it had a monopoly on local phone service.Weiss and Notebaert had worked closely together to reorganize Ameritech's corporate structure from five divisions by state to one in which the state operations were merged into a whole and then divided by product lines, such as local telephone services and cellular services. When Weiss retired on April 20, 1994, Notebaert added chairman of the board to his other offices.
Notebaert hired marketing specialists to run the new divisions of Ameritech, and he changed Ameritech's stodgy style of advertising that emphasized its stability and long heritage to one that targeted specific aspects of the marketplace, such as small businesses, emphasizing Ameritech's high-tech new services. He worked with government regulators as partners, not foes, in opening the marketplace to competition.
Notebaert pressed hard to have Ameritech's local telephone territories opened to Ameritech's long-distance telephone services, and he took the daring step of opening Ameritech's five-state territory to local telephone competition. AT&T leaped at the chance and almost immediately began competing for the lucrative Chicago local market. Notebaert hoped that the move to set aside Ameritech's local telephone service monopoly in exchange for a competitive marketplace would encourage regulators and the courts to allow Ameritech to compete for long-distance services.
This plan put rural telephone users at a disadvantage because urban telephone income had traditionally subsidized the low-profit rural markets. Notebaert proposed a "universal service fund" that would help keep down rural telephone costs to consumers by having all American telephone companies contribute to it. In spite of these efforts and proposals, regulators refused to allow Ameritech to offer long-distance services in the five-state territory. By the end of 1994 Ameritech had 48,000 employees and had operations in all 50 states and in 40 countries.
In 1995 Notebaert targeted economic development, education, and quality of life for Ameritech's marketing. He hoped to develop services that helped businesses process their sales electronically, that helped people commute electronically by working at home and using telephone lines to connect them to their offices, that helped students attend classes from home through a blend of telephones and computers, and that enhanced the security of people through electronic alarms and swift contact of support and emergency services.
Further, he foresaw "electronic government" in which government business could be done with Ameritech Internet services—for example, allowing lawyers to file court briefs electronically. He also wanted voice-activated telephones that allowed a caller just to say a name and have the telephone automatically dial the appropriate phone number; when he found that the Ameritech research and development team was trying to create a voice-activated telephone with a capacity to understand 40 names but already had an inexpensive one that recognized 10 names, he trimmed the research and sent the 10-name telephone to market.
During 1995 he cut about 6,000 jobs, saving Ameritech $350 million. He asked regulators to allow Ameritech to keep the savings because regulations at the time forced such savings to be passed on as lower telephone rates—a practice that discouraged corporate efficiency and encouraged bloated corporate bureaucracies.
In spite of Ameritech's inability to offer long-distance services to its local customers, the company's fortunes boomed during Notebaert's tenure, and he became a very rich man.
Always busy in local affairs in Chicago, where Ameritech was based, he even donated $5 million to help build the Peggy Notebaert Natural History Museum in 1998; it quickly became a prime destination for visitors to the city. When Ameritech was sold to SBC Communications in 1999, Notebaert received a severance bonus of approximately $21 million. Ameritech had had five straight years of growth under Notebaert's leadership, with a 45 percent growth in revenues. Its market capitalization tripled to $70 billion. Notebaert sold Ameritech to SBC for $72 billion, a windfall for Ameritech's shareholders.
MAKING PROFITS AMID DISASTER AT TELLABS
Notebaert promised his family that he would take some time off from work and spend it with them, but there seemed little doubt that he would take a job again. In August 2000, only 10 months after the sale of Ameritech, the board of directors of Tellabs offered him the offices of president and CEO, and he accepted. The management had hopes of tripling its revenues in the next three years, and the board of directors thought Notebaert had what was needed to guide the company through expansion. Notebaert was known for his combination of creativity and steady leadership, and Ameritech had been a customer of Tellabs, which meant that Notebaert was familiar with Tellabs' products.
Tellabs manufactured parts for communications systems. In 2000 its revenues were $3.3 billion. The dot-com revolution had spawned numerous companies that needed equipment for communications and for hosting Web sites, and the possibilities for electronics communications seemed limitless. But in 2000 the dot-com collapse began, with hundreds of communications and Internet companies going out of business. Surviving companies found themselves with overcapacity—more room for business than there was business to be had.The decline in business meant that many Tellabs customers had already purchased more Tellabs products than they could use, which in turn meant that Tellabs lost business it had counted on.
Tellabs was in danger of going out of business almost as soon as Notebaert settled into his new positions. During the first eight months of 2001, he cut 1,000 jobs at Tellabs, including managers, with 50 employees taking early retirement and the others being laid off. They represented 12 percent of Tellabs' workforce. The labor cuts saved Tellabs $120 million. Notebaert himself cut his pay for 2001 by 26 percent and took no bonuses. Revenues for the year were $2.3 billion, down $1 billion from the year before.
In 2002 Notebaert continued to cut jobs, reducing the workforce by a total of 38 percent from 8,900 when he first joined Tellabs to 5,500. "It was awful. You hate firing people—nobody enjoys it—but we did what we had to do," he asserted in 2002 (Knight Ridder/Tribune News Service, June 17, 2002).
During Notebaert's tenure at Tellabs, the company's stock dropped from $50 to $10 per share, yet when he left the company, he was praised by those who worked with him, and he was credited not only with saving Tellabs from extinction but also with making it profitable in 2002. He had done "what's right for the business as a whole," he said (DenverPost.com, June 23, 2002), and he left the company in sound financial condition, although much smaller than it had been, with $1 billion in cash reserves in the bank. He had accomplished his goals in part by focusing Tellabs on two profitable lines of products: the Titan optical products that helped networks interact and the Cablespan line of cables used in electronic communications. He aggressively pursued sales of Tellabs products globally in 80 countries. When it was announced that he was leaving Tellabs, the company's stock fell 6.76 percent in one day.
THE CHALLENGE OF QWEST
Qwest was America's fourth-largest telephone company, but it was in poor shape. In 1999 it had purchased the local phone service provider U.S. West, nicknamed U.S. Worst for its bad customer service, at a cost of $38 billion. Thereafter, the company was beset by problems, although the true extent of the problems became known only after Notebaert took over control and had the company's financial records examined.
During 2000 and 2001 Qwest's stock price fell 92 percent. It had revenues of $20 billion in 2001, but it also had $26 billion in debt. It was being investigated by the U.S. Department of Justice, the Federal Bureau of Investigation, and the Securities and Exchange Commission (SEC) for falsifying financial reports and perpetrating underhanded schemes that made it look like it was earning money when it was not. In one scheme Qwest sold access to its telephone network to companies that then sold Qwest access to their networks for the same amount of money, meaning that no one actually made a profit; however, Qwest entered the bogus sales into its financial books as income to inflate its reported revenues to fool investors into thinking Qwest was doing better than it really was. CEO Joseph P. Nacchio began fishing around Qwest's Yellow Pages business to potential buyers to bring in enough money to stave off disaster. Qwest was on the verge of bankruptcy when Note-baert joined it.
Nacchio was a flamboyant leader who drew publicity to himself and his company and who had pursued an audacious expansion of Qwest. When the company's board of directors looked for a replacement, they favored the low-key manner and traditional economics represented by Notebaert. The board of directors offered Notebaert $1.1 million in salary plus bonuses that would increase his annual income to $1.69 million, and the directors offered him a $14 million bonus if he remained leader of the company until age 65. In May 2002 rating agencies relegated Qwest's bonds to junk bond status. Yet Notebaert may have relished taking leadership of a huge corporation and the challenge of setting it straight. Still, it is unlikely that he realized just how badly off the company was when he became CEO and chairman of the board on June 17, 2002, and relocated to Denver, Colorado, home of Qwest's headquarters. The company was in danger of collapse at any time during 2002. Its fiber-optics network alone was losing more than $500 million annually.
Qwest stock rose 20 percent the day Notebaert was hired. In July 2002 he removed five Qwest executives from their posts and brought in three executives who had worked with him at Ameritech: Oren G. Shaffer, CFO at Ameritech from 1994 to 2000, was made vice chairman at Qwest; Joan H. Walker, vice president of corporate communications at Ameritech from 1996 to 1999 and senior vice president of global affairs for Pharmacia in 2002 when hired by Notebaert, became senior vice president of corporate communications; and Gary R. Lytle, leader of Ameritech's Washington office from 1992 to 2000, became vice president of policy and law. Shaffer went quickly to work, mending fences by visiting the SEC accountant in charge of the SEC's investigation of Qwest and by auditing the company's books. He found $1.1 billion in phony income listed for 2002.
Notebaert found himself in charge of a company of 56,000 U.S. employees that saw a 14 percent decline in revenue from January to September 2002 and therefore might not be able to meet its payroll. Fortune called Qwest "one of the biggest wrecks in America" (January 20, 2003). Notebaert began campaigning among the rank-and-file workers that summer, traveling to meet them in groups, usually small, to tell them of the future he saw for Qwest and to enlist their help, asking wage earners to cut back on the hours they worked. The company's 27,000 union members agreed to forego their scheduled 3 to 4 percent pay increases in exchange for performance bonuses in 2003. Notebaert opened permanent communication between himself and his employees. On the basis of his good name, Notebaert persuaded Bank of America to pull lenders together to lend Qwest $750 million to stave off immediate bankruptcy.
In an action that Notebaert later said he had never done before and hoped never to do again, he pressed Qwest bondholders to forgive much of the debt owed to them. He did this by noting that Qwest could go bankrupt and that those who agreed to exchange their bonds for bonds worth 40 percent less would be placed at the head of the line of investors who would be paid first from Qwest's assets, implying that those bondholders who did not exchange their notes might get nothing at all if the company died. This tactic angered bondholders, but enough of them accepted the offer to reduce Qwest's bonded debt from $5.2 billion to $3.3 billion. In 2003 some bondholders sued Qwest over the bond restructuring.
By the end of 2002 Notebaert had reorganized Qwest's corporate structure into three units: business customer services, general consumer services, and wholesale marketing. He tried to extend Qwest's long-distance services to the old U.S. West local service territories, but as at Ameritech, regulators refused the plan. As 2003 began Qwest had 25 million customers in 14 states, a formidable customer base if Qwest could dig out from under its debts, but the company lost 4.9 percent of its customers from June 2002 to June 2003. Due in May were $3.2 billion in debts that Notebaert and Shaffer managed to persuade debt holders to restructure into longer-term payments. In 2003 Notebaert sold Qwest's Yellow Pages for $7 billion, which was applied to debts. Both Qwest's $16 billion fiber-optics network of 190,000 miles of lines and its long-distance network (in areas where Qwest offered no local phone service) were losing money, and financial analysts suggested that Qwest should sell them, but Notebaert saw them as part of a profitable future and insisted that Qwest hang on to them. He reduced the fiber-optics network from 14 servers to seven because the network was not receiving enough customers to use more than seven; he then moved the fiber-optics network into the jurisdiction of the corporation's business unit. Notebaert shaved off costs even further by cutting 3,500 jobs during 2003. By the end of 2003 Qwest had lost perhaps $470 million for the year on $14.3 billion in revenue but had reduced its overall debt to $16 billion.
These results were achieved not only by cuts but also by new strategies. Notebaert changed the focus of business services from large corporations to midsize businesses, exploiting a new (for Qwest) market. He formed a partnership with Sprint for national wireless service, giving Qwest a big share of the cellular phone market. Part of his strategy rejected the possible sale of Qwest and rejected the possible acquisition of smaller companies; Notebaert pursued alliances such as that with Sprint to expand Qwest's markets without incurring more debts. He placed emphasis on good customer relations and would pose as a consumer to call Qwest customer service representatives to make sure they were delivering good service. Overall, he gave his employees the impression that he was always involved in the company's day-to-day business and that he cared about them and their work.
During 2003 Notebaert was appointed by President George W. Bush to the National Security Telecommunications Advisory Committee, where he worked to establish standards for new communications technologies and to find ways to secure America's communications networks from sabotage by terrorists. When Notebaert accepted his appointments at Qwest, he and his wife moved from Chicago to Denver, although they kept an apartment in Chicago so that they could visit with family and friends. In Denver they were active in the United Way and other local charities.
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