O’Hara’s Departure Paves Way for Change at Level 3

Level 3 Communications Inc. is trying to fix its integration problems with a management shakeup and deeper attention to systems assimilation, say analysts, but whether the strategy works won’t be known for at least six months. But if the Colorado-based carrier makes the right moves, it will be on track to accommodate the booming and well-publicized demand for bandwidth, they say.

Analysts and telecom insiders over the past year have watched Level 3 mishandle six major acquisitions and, subsequently, lose employees and customers. The kicker came on March 10, when Kevin O’Hara, president, COO and co-founder, resigned without notice. CEO James Crowe has taken over as president, and he’ll share O’Hara’s duties with Neil Hobbs. Hobbs was an executive sales vice president but Level 3 created a new position for him, that of executive vice president of operations. Sunit Patel also will remain as CFO, this after Level 3 last fall said it wanted a new CFO but now it wants to keep Patel on board.

All in all, Level 3 is sending a message that it’s trying to clean up its act. And people are watching. “Senior executive departures are a symptom of more systemic problems within a company,” said Eric Paulak, managing vice president for research firm Gartner Inc.

Level 3’s troubles stem from the buying spree it started in 2005 and ended last July, analysts say. With six new companies under its belt, Level 3 has been unable to keep up with provisioning and billing, and its customer service has taken a dive. Because of that, well-known employees, especially on the agent side, have left, and clients, too, have defected. And even with O’Hara gone, the situation’s not likely to improve right away, said Paulak. Chances are some customers won’t renew their contracts over the next couple of quarters and sales will decline, he said.

“That’s where you’re going to see some problems,” Paulak said. “So I think we’re just starting to see [the trouble] because of the iceberg within Level 3.”

The bigger question, though, is why management had a sudden change of heart. For all anyone in the industry knew, O’Hara’s job was safe.

JANCO Partners’ Donna Jaegers speculated that two things happened: Level 3 listened to investors’ input and Crowe, back from surgery to remove a benign pituitary gland tumor, saw what needed to be done and had the energy to do it. “That’s what makes the most sense to me,” said Jaegers, one of the few analysts who upgraded Level 3’s ratings on news of O’Hara’s departure. “Other than that, it’s still sort of a mystery. I’m sure they got this advice from a lot of investors, that Kevin should be the one to go because the problems occurred in his areas, but it’s rare that a company actually listens to their investors.”

“I’ve been hearing that Kevin was part of the cultural problems at Level 3 and I’ve been hearing nothing but good things about Neil Hobbs,” Jaegers added. “I think this change is very constructive for Level 3, longer term.”

David Hold, a network services analyst for Current Analysis Inc., agrees. But Level 3 is at a critical juncture, he says, and also needs to stay focused on the short term. “They really do have to get those integration processes smoothed over so they can run the company efficiently,” he said. “We’ll know in six or nine months if they’re successful or not.”

If Level 3 comes out ahead, it stands to benefit from “solid growth in bandwidth demand and Internet traffic, which play to Level 3’s strengths,” Hold says. “So they’ve got some challenges ahead, but they also have some fundamental strengths that I think are very well-suited to the growth and changes in the Internet. And the demand for bandwidth is really a global phenomenon.”