Keith Epstein

The $8 Billion Man Battles Back

Keith Epstein
Special to Washington Techway
Sunday, November 26, 2001

Facing a financial storm, XO Communications looks to the survival skills of Dan Akerson, the intensely competitive CEO, and his team. Can they keep XO moving ahead while reducing oppressive debt?

Beneath perfect peaks near Aspen one day, legendary quarterback Roger Staubach and corporate buyout specialist Nick Forstmann were teeing off at Maroon Creek, one of the world’s trickiest mountain courses, when XO Communications CEO Dan Akerson joined them. “We were playing tough, having a good time,” recalls Staubach. “Then Dan starts challenging us.”

Staubach, the former “Captain Comeback” of the Dallas Cowboys who has kept making big plays in real estate, and Forstmann, whose success brought him and brother Theodore superstardom in financial circles, had been anticipating a relaxing round of golf in the restorative Colorado air.

“We’re playing heads up,” Akerson called to his buddies. “Five bucks I’ll beat you on this hole.”

So far, nothing unusual. Lots of people bet at golf, hole by hole. But then Staubach hit one of the best drives of his life. He birdied the hole. It was so impressive you can still hear the glee in his voice a year later.

Akerson’s shot, meanwhile, landed in the water. He’d blown it. Lost his five dollars.

No matter. He called to Captain Comeback: “Bet you five bucks I make this putt!”

Akerson’s ball was at least 25 feet from the hole, an impossible distance. But somehow Staubach knew better. “No thanks, Dan. I’m taking your money.”

Akerson lined up the putt and stroked the ball. He sank it.

“Unbelievable,” Staubach recalls. “He has that kind of confidence. He couldn’t win the hole, but he was still determined. He couldn’t stand that I beat him, and even without my taking the bet, to make up for going on the water, he was like a laser gun. Somehow, I knew he’d make it.” Adds the pro-football hall of famer, winner of a Heisman trophy and four Super Bowls: “I’m competitive, but nothing like him.”

Staubach was famous for never accepting that a game was over, no matter how many points his team was down. Akerson, too, isn’t giving up — and he’s down by more than points. Analysts, investors, bondholders, the press, Wall Street, the very economy and forces beyond his control are breathing down his neck. The numbers are mixed, and the debt is deep. It’s open season on telecoms, and many CEOs are in the water.

No matter. This chief executive may just sink the putt.

There are people who would bet against the $2 billion man. That’s how much XO has lost since he took over, nearly $400 million in the last quarter alone. To some, he might be the $8 billion man — counting losses in 22 quarters at Nextel Communications, where he reigned for 14 quarters and from which he stepped down as chairman this month.

At the XO helm, Akerson has continued to display the same gift for aggressive operations management that helped build MCI, turn around Nextel and before that turn around another technology company. Not only is XO one of the region’s few telecom startups still standing, it’s generating more network use, control over expenses and revenue growth than ever. Even quarter-by-quarter losses are lessening.

Yet since March 2000, XO shares have plummeted from $66 to barely a buck, and with bondholders now facing the prospect of retrieving perhaps only 50 cents for every dollar they put in, share prices could be driven down still further.

The irony is that the company is foundering not from lack of sales, inefficiencies or poor operations but from more than $5 billion in debt and $2 billion in preferred stock. As it turns out, Akerson also has the gift, hardly uncommon in the industry, for accumulating intensive debt and equity obligations.

The CEO, whose compensation package was among the region’s highest last year at $977,950 excluding 6 million options, has forgone any of his $500,000 base salary since August. But for many that has hardly taken the bite out of last month’s 600 layoffs — 8 percent of the workforce — the scaling back of ambitious plans and, worst of all, the weighing of the most dire alternative in the playbook, out-of-court restructuring if not filing for Chapter 11 bankruptcy itself.

“Underperform” is the word some analysts are now using publicly — a polite understatement next to what they say privately. “Hubris” is the explanation offered by one accomplished Wall Street hand. Though of course if the economy had kept churning magically, these same detractors would be singing Akerson’s praises. Such leveraged balanced sheets wouldn’t be leaden. Hubris would be heroic.

During the company’s latest earnings call Nov. 8, some analysts found the company’s operations numbers impressive, but the tone seemed uncharacteristically subdued. Repeated words such as “uncertainty” and “ambiguity” hung like a gloomy cloud over the proceedings at XO’s Reston headquarters.

During the conference call, you could hear clouds in the voices: November already — but the fourth quarter was anybody’s guess. Buying-back $1 billion in debt and preferred since July at 28 cents to the dollar — but at a price that left only enough funding to keep operating into the second half of next year, rather than into 2003. Sales strong — but slower to make, and outside restructuring advisers Houlihan Lokey Howard & Zukin likely to arrange paying lenders mere fractions of what they put in. Akerson’s voice of calm — but marked by occasional clearings of his throat.

“They’re in a real bind now, that’s why he sounds so humble,” explains Glenn Waldorf, research analyst for UBS Warburg. “The company took on too much debt, it’s as simple as that. He thought they could conquer the world, and they thought their business would be stronger and they could keep getting money from the capital markets to pay off that debt.”

XO and Dan Akerson aren’t alone. This year, phone service companies have been going out of business at a rate of almost one a week. The beat didn’t go on for Rhythms NetConnections. Out for the count was Covad Communications Group. Winstar Communications faded. Teligent tanked. E-spire Communications expired. In Northern Virginia, even well before Sept. 11, Internet pioneer William Schrader flailed before failing to keep his beloved PSINet — and grand telecom visions — afloat in a sea of layoffs and red ink. This month, XO’s broadband competitor, Herndon-based Net 2000 Communications, said it would seek bankruptcy court protection.

Indeed, XO’s symptoms are hardly caused by some rare underlying ailment. The company “got caught up in the situation a lot of other companies faced — a real land-grab mentality,” says analyst Riyad Said of Friedman, Billings, Ramsey. “Their plan was real ambitious. But they got caught still needing more capital at a time when the capital markets shut down and Wall Street was less focused on capital and more focused on debt levels and cash flow.”

Consequences for XO have been severe. The company retreated from bold $2 billion plans in Europe. It pulled out of Canada. It abandoned dreams of electronic commerce and other application ventures. Telecom’s stunning meltdown has left many sick and disheartened, no less so at XO.

“This is not at all what XO was going to be doing right now in the year 2001,” observes Todd Wolfenbarger, Akerson’s vice president for communications. “But a pretty stiff storm has been underway in telecom for about 15 months. It’s blowing hard and I’m not sure we’re seeing the clouds breaking yet. Everybody’s taken on water on their ship.”

Analysts cite factors in Akerson’s favor: Strong operations and unique services on a largely built-out fiber network, flexibility in buying back debt, and marquee investors who drive perceptions and can drum up more cash. Akerson’s ship is listing, but may be able to hold out just long enough to survive the storm. Whether it does will depend not only on the length of the storm but Akerson’s own agility in juggling a balance sheet of fragile cross-interests.

Observes a hopeful Wolfenbarger: “We have people driving this ship who have been in difficult times before.”

Akerson is no stranger to ships of war. In fact, he has credited his prowess at the corporate helm to lessons learned from men associated with vessels. First, his father, an enlisted Navy man who as the coach of his Little League team modeled how a person might drill, scold and drive players hard, yet also love and nurture them. Later, at the U.S. Naval Academy, where from the outset lowly “plebes” must prove their abilities under various forms of mental and physical fire. Until then, he was unfocused. Since then, he tends toward razor-sharpness. “I needed those four years,” he would say later.

Between 1966 and 1970 — a time when Vietnam consumed the minds of many young Americans in the opposite direction — Akerson excelled under the pressures of regimented military life. For four years, he achieved, based on confidential assessments of classmates, the highest ranking in his company. They fully expected him to become a famous admiral.

“Even though he was one of the most demanding in our class — the severest disciplinarian — he was respected by underclassmen because he treated them fairly,” recalls Jim Perry, a retired Navy captain who was Akerson’s roommate and continues to be one of his best friends. “He was — how do I say this? — very intimidating. But also firm and fair.”

As a boy, Akerson enjoyed figuring out how things worked. He would take watches apart, studying their innards. At Annapolis, he studied engineering. But what he really acquired was a systematic way of cutting through chaos, solving problems decisively, responding to daily shifts in competitive positions with agility and confidence and motivating others — in short, learning how to be a hard-charging leader. “My ambitions,” Akerson acknowledged to a USA Today reporter in 1996, “have never been meek.”

For coach Akerson, it’s not how you play the game. “I want to win,” he tends to say — even while not always winning friends. He commands respect, not popularity. “I don’t come to work to be loved,” he’ll say. “I’ve got three kids and a family at home.”

Akerson cut his executive teeth under some of the toughest coaches in the business. At MCI, which he joined in unprofitable 1983, the chief executive, Bill McGowan, was tough on his protégé — but also supportive. Akerson became MCI’s president and chief operating officer. It wasn’t always easy, but MCI became the nation’s second largest long-distance provider.

After a stint at investment firm Forstmann Little & Co., Akerson got his first shot at top command. As CEO of General Instrument, a cable TV technology company, he built trust and teamwork, listening to employees but also pushing them harder than they’d ever had to perform. After only two years in the job, Akerson showed impressive results. Sales doubled.

Enter Craig McCaw, the elusive entrepreneur who virtually invented the cell phone industry. McCaw — the “Michael Jordan of telecommunications” — needed help at Nextel Communications. He’d invested more than a billion dollars to build a wireless national telephone network, only to have problems with the microprocessor. Akerson was McCaw’s “dream candidate.” He would fix things. Declared the new CEO: “Our team will make things happen fast.”

It did. Akerson and his president, Tim Donahue, swiftly cleaned house, shaking up management and the sales force. Akerson focused marketing efforts, cutting price plans and targeting work groups such as doctors. Though the stock was floundering and debts and losses were piled high, Nextel pushed service in 200 cities and plotted an assault on the international market. Sales rose to $3 billion. The stock soared. Never mind that Nextel was years from showing profits.

Nextel’s president, Donohue, says he got a tough education under Akerson. “I learned a lot from Dan, especially the way you challenge an organization,” says Donahue. “Dan does not suffer fools well. He has high expectations of his people.” Donahue, now Nextel’s CEO, calls Akerson “one of the most aggressive people you’ll meet in the business.”

And then, just as things seemed to going great for Akerson and Nextel, McCaw moved his protege out into McCaw’s personal investment company. Akerson told associates he would retire and embarked on a two-week vacation, the first he’d ever taken.

McCaw and Akerson may have had their differences. While McCaw tended to be soft-spoken and kind, “Dan’s tough and strong,” McCaw spokesman Bob Ratliffe told a reporter in 1999. “Not to say that Dan’s not kind.”

Akerson intimidates. He looks like the friendly guy at the next table at The Tower Club, the kind who probably tells good jokes and is enjoyable company. Many people say he is, and that he has a sense of humor. Evidently, he can also be so cranky, sometimes exhibiting a temper and so deserving of his kick-butt reputation, that even his friends — pretty tough guys themselves — can be cautious about him.

Managers are circumspect about what they say, even those paid to speak on his behalf. None are shy, but some shy from telling specific stories about the man they respect and follow, the way players follow Redskins coach Marty Schottenheimer. Staubach likens him with his own famous coach, Tom Landry. “Only Landry,” says Staubach, “wasn’t as vocal.”

Ken Sharer, Akerson’s old academy classmate, now CEO of California biotech Amgen, notes that Akerson has been “a tenacious guy from the first day” at Annapolis — “intensely focused on results. Results are all that matter to him.” Asked for examples, Sharer responds, “I think I’ll just leave it at that.”

Back when Akerson was at MCI, he wanted to move a large system software group to Dallas. He was determined to have Staubach find a large parcel of land, have the zoning and other issues straightened out, and have the move completed — fast. It had to happen within a year instead of the usual two. Staubach was sweating.

“We were at the mercy of the customer,” the football star-turned-real estate czar recalls. Characteristically, Captain Comeback scored, and the two have done similar business deals ever since, though not without headaches for The Staubach Co. “I think my having gone to the Naval Academy only makes him go harder on me. His expectations are high. Sometimes it works against us — because I want to make sure I’m going overboard to meet his demands.”

Such drive shows in the conference room — and in the stands. At Army-Navy football games, Navy’s own intense legend is wont to talk with his friend at just the wrong moment. Reports Staubach: “If you watched him sitting there, you really don’t want to bother him, you know? His intensity really shows. I’m sure the people who work for him see that.”

Indeed they do. Try telling Dan Akerson at a critical time you’re taking a break or heading home, and you might get a lecture on wartime reality. The CEO could well say, imagine you were a soldier in the heat of battle, say, off in distant Vietnam, and found a flaw in your machine gun. Some guy back at the Pentagon tells you, “I don’t know what’s wrong, it should work. We designed it right. I’ll check on it after lunch.” Akerson’s message, according to his CFO, Nate Davis: “Your job is to help the person on the front line and worry about the customer ? not go to lunch.”

“A lot of people will trash Dan, saying he’s tough and mean,” observes former protégé Donahue, the Nextel CEO. “And if you don’t do your job, he’s not a real fun guy to work for.”

Indeed, even before the dreadful descent of the telecoms, it wasn’t all hugs and kisses for the company with the ticker symbol XOXO. At an investor conference following XO’s branding a year ago, Akerson joked he was getting in touch with his feminine side. There was plenty of laughter.

But those who know him best say the seemingly testosterone-driven telecom chief has always had softer tendencies. He spends huge amounts of time with his family and is said to be heavily involved in his church. Though fascinated with great non-softies of history — he reads books on Napoleon — Akerson also has handed male associates copies of the recent bestseller by Stephen Ambrose, “Comrades.” “He comes across as harsh, but he’s really a sweetheart of a guy,” says CFO Davis. “He actually cares about people more than they know.”

Observes friend Perry, the former Navy captain who now serves as XO’s director of construction management: “He’s not the cold-hearted, ruthless bastard people seem to think. He is a fierce competitor who expresses himself forcefully and gets in your head. But he’s also really good to people.”

Indeed, the calculating, metrics-manic CEO, seemingly cold as steel, sometimes shows another side when associates least expect it. He reminds managers to make the right decisions “or some young person’s family won’t be able to pay their bills.” Last month, during an “all-employee conference call,” Akerson spoke about the 600 layoffs. People could tell the decision bothered him deeply.

Davis recalls another incident 15 years ago, during a reduction-in-force at MCI. Davis had come up with a list of people to let go, but Akerson said the plan wasn’t good enough; cut some more people and expenses. Next day, Akerson was back in Davis’ face, this time demanding justifications for including certain employees on the lengthened list. He pointed at one name, railing at his subordinate: “She’s a single mom. She has no income. How can you do that?”

Whatever his differences with McCaw, whatever Akerson’s presumed retirement plans after leaving Nextel in 1999, within a few months the operations-minded admiral was back. McCaw enlisted him to steer a key property, Nextlink Communications.

Already, the broadband provider had become an Internet access provider, had acquired 95 percent of the local midpoint cellular spectrum in the top 30 cities, and had built 16,000 miles of fiber backbone — enough to ferry all of Goliath AT&T’s traffic. Once more, Akerson was motivating his troops to “take the hill.” Nine months after taking over, he declared that he would take Nextlink from a mere $275 million in annual revenue to $15 billion. It would happen in only a few years.

Fast-forward a couple of those years. That would be now. Thanks to the heavy borrowing, Nextlink-turned-XO has built out much of its high-speed network spanning 63 cities, and not just with voice capability but also private networking, Web hosting and teleconferencing. Fiber totals 64,000 miles. Akerson also has spent millions on ads for brand recognition and had embarked on a $2 billion conquest of 21 European markets.

Anticipated 2001 revenue: $1.2 billion.

Anticipated 2001 objective: Survival.

The situation now demands a delicate re-jiggering of conflicting objectives — growth and retrenchment, expenditure and buying back of debt. It will require a certain agility. Daniel Zito, a Lehman Brothers financial analyst, notes that XO is engaged in “a big balancing act.” Akerson’s team has got to preserve existing liquidity while unloading the ballast of debt — but without shrinking the company so much that it won’t be able to service the remaining debt load.

These days, Akerson doesn’t want to talk about himself; he declined repeated requests for an interview, or even a few words under controlled conditions. This may be third down and 20, punter warming up on the sidelines, but even now he’s not focused on managing perceptions or punditry but metrics and financials. Behind closed doors, he exhorts managers at “senior leadership meetings” to ignore Wall Street and media negativity.

Akerson is said to believe that a company’s prospects never turn solely on the abilities of any one person. Yet how he commands from here could make a big difference. “I don’t want to underestimate the scope of what’s in front of him. And it’s never just the force of personality that drives things,” observes Zito. “But certainly Akerson’s reputation and prior successes — and his aggressive personality — put him in a good position. If anybody can pull this off, he’s the type of senior manager who can.”

Shareholders, bondholders, employees and banks, meanwhile, may be in for a rough ride. Akerson is, after all, in the water, and though the stakes are higher than five or 10 bucks a hole, it’s the same concept. “He’s had to get his feet very wet,” says UBS Warburg’s Waldorf. “It’s not going to be a clean stroke from where he is. He’ll have to get very dirty in the process of making this shot. Whether he makes it, we’ll see. We certainly hope so.”

Washington Post Techway Media Group