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Royce Holland had reached his boiling point. It was August 1997, and his company, a Dallas-based telecommunications start-up, Allegiance Telecom, Inc., had for weeks been in arduous financing negotiations with Madison Dearborn Partners, a Chicago-based private equity fund. Holland thought the parties were within a hair’s breadth of locking up a vital, $100 million deal. But Madison Dearborn’s lawyer, a Kirkland & Ellis partner named Mark Tresnowski, kept bringing new demands to the table. Finally, at the end of one trying session in Kirkland’s Chicago offices, Holland, Allegiance’s chief executive and cofounder, got fed up. He accused Tresnowski of trying to derail the deal. Before long, the normally affable, slow-talking Texan was yelling. “I just exploded,” Holland recalls. “My nerves were frazzled, and I was frustrated by Mark’s tenacity. He honestly had me a little bit shaken.” Midway through the rant, Thomas Lord, Allegiance’s chief financial officer and other cofounder, had to step in and usher the red-faced Holland out of the room. The tirade didn’t faze Tresnowski, who had spent much of his career playing hardball at conference tables. “I turned to Tom [Lord] and said, ‘Look, I’m sorry your guy’s upset, but this deal is fair, and this is the deal we agreed on. I’m not going to change my position.’ “ Ultimately Holland agreed to the terms, and the Allegiance team flew back to Dallas. But Holland couldn’t shake his lingering thoughts of Tresnowski. “He blew me away,” he says. “I couldn’t help but think that he was the best deal lawyer I’d ever seen.” A week later, Holland picked up the phone and asked the Kirkland lawyer if he’d sign on as Allegiance’s acting general counsel. Flattered and surprised, Tresnowski agreed. A year later, Holland convinced his former opponent to leave the firm and become Allegiance’s full-time GC. Tresnowski, now 43, was an interesting pick for Allegiance � and not only because he’d once gone toe-to-toe with the company’s chief executive. A little over a year earlier, Congress had passed the Telecommunications Act of 1996, a landmark bill that promised to let new companies like Allegiance, called competitive local exchange carriers, or CLECs, compete alongside the Baby Bell companies in the nation’s local telephone markets. But the act’s early days were rocky. By 1998, state and federal regulatory battles, litigation between upstarts and the Bells, and constitutional challenges to parts of the new law had driven the nascent industry into a state of chaos. In this arena, the Chicago deal lawyer seemed out of place. Tresnowski had never tried a case. And he was unseasoned in the arcane practice of telecom law, with its byzantine regulatory schemes and clubby inside-the-Beltway culture. But none of that bothered Holland, who wanted Tresnowski more for his business acumen than for his legal skills. “I knew I could go out and hire a litigator or an off-the-shelf regulatory lawyer if I needed one,” he recalls. “But Mark was unique. He was a rainmaker.” From the moment Holland called him, Tresnowski did much more than hold beauty contests and review bills from outside counsel. He helped Holland and CFO Lord shape the company’s business plan. He searched for companies to acquire. He shepherded public stock prospectuses. When disputes with the Bells flared up, he reminded Holland and Lord of the company’s litigation philosophy: The less, the better. Compared to its industry peers, Allegiance has done well. Since 1999, more than 30 telecom start-ups have either folded or been swallowed. But Allegiance has built telephone facilities in 36 cities and, in the past two years alone, has booked close to $900 million in revenue. Telecom analysts say that Allegiance is one of only a few CLECs poised to survive the meltdown that hit the industry in 2000. But the company has yet to turn in a cash-flow-positive quarter. Its stock at press time sits barely above ground level, at 50 cents per share � down from a March 2000 high of over $105. Delisting from Nasdaq is a real possibility. Things could get even worse. Bank covenants require Allegiance to pay down its debt by half by the end of April. The company does not have the cash right now. Tresnowski and Lord are trying to convince the banks to restructure the debt. Additional borrowing is virtually impossible; the once-friendly investment community is running from anything connected to telecom. Even Tresnowski concedes that Allegiance might well be on its way to a Chapter 11 filing. And that, say telecom observers, would send shock waves through the industry. “Allegiance did what the act envisioned: it raised money and built its own facilities,” says Peter DiCaprio, a telecom analyst at Boston-based Evergreen Investments. “The company has emerged as an industry bellwether. An Allegiance bankruptcy will be just another nail in the coffin of the 1996 act.” Tresnowski’s shouting match with Holland wasn’t the only time he dealt with a fierce opponent head-on. At Kirkland, he built a reputation as a hard-nosed, unflappable, and tireless advocate for his clients. Kenneth Dunn, formerly the transactions counsel at Ameritech Corp., hired Tresnowski to handle the company’s 1997 purchase of Tele Danmark, the Danish national phone company. According to Dunn, the negotiations in Copenhagen were combative. “Some high-level Danish cabinet members pushed us extremely hard,” says Dunn, now deputy general counsel at Denver-based Qwest Communications International Inc. “But Mark was even more aggressive. He yelled and screamed a little and landed absolutely every punch. He got us a very good deal.” But according to Carter Emerson, a Kirkland corporate partner and member of the firm’s management committee, Tresnowski’s attack-dog negotiating style is just a “game-day” act. When he’s not facing someone across the table, Tresnowski is actually a nice guy. “Mark has a great sense of humor, and simply refuses to take himself too seriously,” Emerson says. “Clients loved being around Mark as much as they loved watching him work.” Even Kirkland associates liked Tresnowski. Annie Terry worked with him for several years at Kirkland before joining him at Allegiance in early 1999. “Most partners would have to call around to find a first- or second-year [associate] to do work,” she says. “But with Mark, associates would literally be lined up outside his door waiting to find out if he needed any help.” Tresnowski says that while the Jekyll-and-Hyde portrayal is “pretty accurate,” most of his deal-room huffing-and-puffing is actually rehearsed. “I don’t always need to resort to it,” he says, “but I’ve learned through the years that anger and emotion can be very effective negotiating tools.” By law firm standards, Tresnowski’s life at Kirkland was good. He commanded respect. He traveled the globe helping the world’s biggest companies make headline-grabbing deals. And along the way, he made gobs of money � in 1998 Kirkland partners pocketed an average of just over $1 million in profits, according to Corporate Counsel‘s sibling publication, The American Lawyer. So what possessed Tresnowski to leave for Allegiance, an unestablished telecom company? “For one thing, a pretty big equity upside,” says Tresnowski. Make that a whopping equity upside. Tresnowski says that while he took a 75 percent pay cut to move to Allegiance, he received some 330,000 Allegiance stock options, whose worth climbed to over $50 million at one point in early 2000. “I sold some of them, but reinvested the money in other telecom stocks and lost pretty much all of it,” he says. “My wife nearly killed me,” he adds, before chuckling uneasily. Aside from the promise of riches, the opportunity also scratched a long-nagging itch to work at a company. In 1982, while a senior at the University of Illinois, the psychology major found himself with a little extra time on his hands. So he “took a few accounting courses,” then studied for the CPA exam on his own. He passed. “From that point on, I’d always wanted to work on the inside,” he says. In his job negotiations with Holland, Tresnowski reverted to negotiator mode and made some tough requests. He didn’t want to move his wife and four kids to Dallas. Fine, said Holland: He could work from the company’s Oak Brook, Illinois, office. And Tresnowski didn’t want to be pigeonholed as “the general counsel who sits in his office and tells people what they can and can’t do.” Rather, he wanted to be a part of management decisions and have steady access to Holland’s ear. Those were requests the CEO was all too eager to fulfill. “I knew who we were getting,” says Holland. “Asking Mark to be just a general counsel would have been like asking Secretariat just to pull a plow.” At the start, a backlog of mundane legal work greeted Tresnowski. There were intellectual property problems, customer complaints, and small contract disputes to untangle. But slowly, as the company grew, so did the legal department. Tresnowski brought in Terry, his former Kirkland associate, as well as a slate of other attorneys, two of whom were to handle regulatory work out of the company’s Washington, D.C., office. The extra hands let Tresnowski take on the senior executive role that he and Holland had outlined. In early 1999 Tresnowski negotiated the acquisitions of two Dallas-based Internet service providers, ConnecTen, LLC, and ConnectNet, Inc., which bolstered Allegiance’s ability to offer data services. And around that same time, when the business needed more money to continue its city-by-city expansion, Tresnowski and Lord decided to offer more stock rather than dip back into the high-yield debt markets. The move ran counter to the advice of bankers at Salomon Smith Barney, who warned that a bad offering could make it much harder to secure high-yield debt down the road. But Tresnowski and Lord showed the bankers: The April 1999 offering brought in $500 million. Tresnowski’s biggest money-raising coup was yet to come. In 1997, the company had promised investors that by 2000 it would have built telecom facilities in 24 markets (a number that later expanded to 36). But by late 1999, the start-up needed a big infusion of cash to finish the job. The Allegiance management committee mulled over its options. The executives were loath to take on more debt. But none of them knew if the equities market would support another stock offering. The executives decided to gamble and issue more stock. For close to a week, Tresnowski, with some Kirkland lawyers, worked around the clock preparing the Securities and Exchange Commission prospectus, knowing that the slightest paperwork glitch could delay the offering by weeks. The SEC approved the lawyers’ handiwork, and in February 2000, a few weeks before Nasdaq fell off the table, Allegiance raised an additional $700 million in equity. To many outsiders, the impeccable timing reflected nothing but sheer luck. But Holland disagrees. “So much of that was Mark’s doing,” he says. “Mark lobbied for the offering, then churned out a flawless product.” In turn, Tresnowski credits Holland for choosing a negotiator rather than the default-choice litigator for his job. The CEO wanted a negotiator for another reason. In his mind, a dealmaker would have a better shot at keeping the peace with the Baby Bell companies, a feat many CLECs were finding difficult. After the passage of the 1996 act, the Federal Communications Commission required the Bells to open parts of their own networks to the CLECs. But during the late 1990s, the CLECs complained often and loudly that the Bells were ignoring their service requests. The Bells typically responded that they were doing everything they could to process the mounting stacks of requests. Often, disputes wound up in federal court, in the form of antitrust lawsuits. Holland wanted no part of those battles. “After the act passed, you had to look at the Bells differently,” he says. “Now they were your business partners, not your enemies. It would have been foolish to file an antitrust suit every time we had a problem.” Instead, Holland and Tresnowski made a peace offering. In 1999 the company set up a system with Bell Atlantic Corp. � the first system of its kind � that kept careful track of all of Allegiance’s service requests. Allegiance later supported Verizon’s application to enter the long-distance market. And last June, Tresnowski convinced the company to hire Lawrence Strickland, a former vice president at Ameritech, to do nothing but “manage the relationships” between Allegiance and the Bells. Has the contrarian strategy paid off? The company has saved a pile on litigation fees. And Tresnowski feels it has made the employees more focused. “We have a rule which says that nobody can blame missing his or her numbers or any other problem on the Bells,” he says. “It’s like the farmer blaming the weather for a bad season. It’s just not constructive.” As a rule, the Bells won’t talk about their customer relationships. But at least one Bell recognizes the effort. “Allegiance has chosen to work with us on a business-to-business relationship,” says David Kerr, a vice president at SBC. “It’s an approach we very much appreciate.” Two and a half years ago, Allegiance moved most of its 3,000 Dallas employees into a gleaming glass building north of downtown that bears the company’s name. Inside, the offices aren’t opulent, but they’re bright and reflect an optimism engendered by efficient, well-managed enterprises. The appearance of success isn’t illusory. In many ways, Allegiance is an unqualified success. The company serves over 150,000 customers, among them American Express Company, Wal-Mart Stores, Inc., and the Farmers Insurance Group of Companies. It has nearly doubled its revenue in each of its six years of existence. And, according to Evergreen’s DiCaprio, “Allegiance is the best-positioned CLEC in the country.” Even so, Allegiance might not make it. Doomsday isn’t imminent; the company still has $300 million in cash. But the debt markets are dry, and the telecom equity markets are downright parched � Allegiance’s stock has been mired at around or below $2 for close to a year. But those are trivial concerns compared to what looms ahead. By the end of April, bank covenants require Allegiance to reduce its debt by $660 million. Unless it wins at Powerball, the company knows that its only option is to renegotiate with the banks. At most businesses, the negotiating duties would fall solely into the CFO’s lap. But at Allegiance, they’ll fall equally into Tresnowski’s. “Mark commands respect in the investment community,” says Reed Hundt, the former FCC chairman and current Allegiance board member. “He absolutely deserves to have a huge role in these talks.” The GC and CFO have their work cut out for them. “Right now, Allegiance’s destiny is completely in the hands of the banks,” says Dana Frix, a telecom partner in Chadbourne & Parke’s Washington, D.C., office who represents a number of CLECs (though not Allegiance). “And the banks I’m talking to are sick and tired of having anything to do with telecoms.” The covenants were originally scheduled to expire last fall. But in early November, Tresnowski unleashed his inner pit bull and got the banks to delay the expiration. “I told them to can their speeches on how bad our legal posture was and work on helping us get this company around the corner,” says Tresnowski. The banks eventually relented. But since then, Allegiance hasn’t come up with $660 million. And Tresnowski isn’t so sure that the banks will be eager to grant another extension. According to Tresnowski, he’s spending “close to 100 percent of his time” at Allegiance trying to come up with a solution they will buy, like swapping liquidity for debt or lining up new investors. What if the lenders decide they’ve heard enough from Allegiance? “Well, then we file for some form of bankruptcy,” concedes Tresnowski. “But that’s really not an outcome any bank wants.” No, but it’s a stark possibility. And if it happens, some experts think it could mark the beginning of the end of the CLEC experiment. “If CLECs like Allegiance go away, only big companies like AT&T [Corp.] will be left to compete with the Bells ,” says Atlanta-based independent telecom analyst Jeffrey Kagan. “That will be a bad thing for the American consumer.”

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