Competitive Intelligence

Throwing in the Towel: Verizon "Wins" Qwest for MCI

Verizon will acquire MCI for $8.35 billion after Qwest capitulated, saying the bidding process was "permanently skewed" against it. Verizon won its costly, 11-week fight to acquire MCI on Monday after Qwest bitterly withdrew from the bidding war deciding the long-distance company "never intended to negotiate in good faith." The final blow came when MCI said some of its biggest customers just don’t want to do business with Qwest, so Qwest "qwit" a few hours later.

The best part of the deal for Qwest is, it cost its rival a billion dollars (almost) more than it'd originally intended, perhaps having the desired effect the company had been seeking all along. Here's a rundown of the bloodbath from the Washington Post:

Though marred by one of the largest accounting scandals in U.S. history and a shrinking business of providing long-distance service for consumers, MCI still sports a valuable stable of corporate and government customers that Verizon and the much smaller Qwest sought in order to compete in the new environment. MCI also operates an extensive chunk of Internet "backbone," the network that carries data traffic around the world.

For Washington area MCI employees, the buyout probably will bring more pain and uncertainty after several years of steady layoffs.

In February, when they first made plans to team up, Verizon and MCI said the acquisition would save about $1 billion a year and result in the loss of 7,000 jobs from a merged workforce of about 250,000. The firms have not said how many of those jobs might be in the region, where they employ roughly 3,500 people.

In choosing Verizon's sweetened bid over the weekend, MCI's board spurned for a third time higher offers from Qwest. Qwest lashed out at its takeover target upon hearing the news yesterday but said it would end its pursuit.

"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the Denver-based phone company said in a news release.

"It is only fair to conclude that MCI is more interested in bending to Verizon's will than serving its shareholders."

If the AT&T and MCI takeovers are approved by the Federal Communications Commission and the Department of Justice, they will all but eliminate the independent long-distance business that flowered after regulators forced phone companies to share their lines.

Today, regional phone giants such as Verizon and SBC can offer long-distance service bundled at attractive prices with local service, while their wireless divisions offer free long-distance service.

Internet telephone service also is growing, with some plans including low-cost calls to Canada and parts of Europe.

Verizon's latest bid for MCI, totaling roughly $8.5 billion in cash and stock, is less than Qwest's latest offer of roughly $9.74 billion. But MCI's directors reasoned that the much larger Verizon is less burdened by debt, has an extensive wireless business and could take better advantage of MCI's assets than Qwest.

"From the standpoint of risk versus reward, Verizon's revised offer presents MCI with a stronger, superior choice," said MCI Chairman Nicholas deB. Katzenbach.

Under Verizon's latest offer, MCI shareholders would receive about $26 per share, $5.60 of which would be in cash and the rest in Verizon stock. The total price tag of the deal could rise depending on the price of Verizon stock.

Overall, Verizon's offer is about $900 million more than its previous bid.

Qwest's offer would have netted MCI shareholders about $30 a share, with about $16 in cash and $14 in stock.

MCI said in a news release that "a large number" of its business clients said they preferred an acquisition by Verizon and requested the right to terminate their contracts if Qwest were the buyer. MCI did not name the customers.

Some large MCI shareholders, who had helped keep the bidding war alive, continued to criticize the company's board for consistently embracing lower Verizon bids.

"No one jumped for joy" when Verizon revealed its latest offer, said David Ahl, an independent telecommunications consultant who is advising several of MCI's biggest shareholders. "No one said 'Oh, we're saved.' "

Ahl, who also personally owns stock in MCI and Qwest, said the new Verizon bid appeared designed primarily to bring other MCI shareholders up to par with Mexican financier Carlos Slim Helu, who had been the company's largest owner.

As the prospect of a proxy war for the company grew, Verizon secured a 13.4 percent stake in MCI by buying Helu's shares for $25.72 each, higher than its bid for the company at the time.

Ahl speculated that Qwest might still urge MCI shareholders to reject the Verizon deal.

But Steven M. Cohen, chief investment officer of Kellner Dileo Cohen & Co., a New York hedge fund that holds MCI stock, said it appears to him that Qwest is abandoning its pursuit.

"I'm disappointed in the MCI board," which "repeatedly has given its blessing to a lower-priced Verizon bid," Cohen said.

A Qwest spokeswoman declined to comment about the company's plans beyond its written statement. "The proposed industry mega-mergers will undoubtedly reduce consumer choice," the company said. "These issues will need to be addressed during the regulatory approval process for the Verizon/MCI and SBC/AT&T mergers."

Qwest already has told regulators it opposes the SBC-AT&T combination.

Of course, the fix was in a while back from the shareholder lobby. Three weeks ago, Mexican billionaire Carlos Slim Helu sold his shares of MCI to Verizon for more than $25.72 per share, which, with contingencies factored in, amounts to more than $27.00 per share. Since then, a number of MCI’s shareholders have been openly critical of MCI’s board, saying that it was creating two classes of shareholders by accepting any Verizon bid below what Slim was getting.

Still, Qwest stuck it to Verizon in the end - and the biggest winners in all of this are MCI's shareholders. Carlos Slim alone netted several hundred million dollars profit from those MCI bonds he bought on the cheap a few years back in the post-Worldcom fiasco. And that's real money.

- Arik