Verizon on Monday threatened to withdraw its $7.5 billion offer to buy MCI if the MCI board decides that an $8.9 billion bid from Qwest is “superior.”
Qwest has given MCI until midnight tonight to make a decision. Verizon implied Monday that it won’t bid higher and wants MCI to move forward with the Verizon-MCI merger agreement signed last week.
There are several possibilities:
MCI could accept Qwest’s $8.9 billion offer, giving Verizon five days to make a counterbid, but such a counterbid now seems unlikely.
MCI could accept Verizon’s offer, which would most likely trigger a hostile takeover bid by Qwest.
Regardless of MCI’s recommendation, Verizon could force MCI shareholders to vote on their original $7.5 billion deal.
MCI declined to comment.
The MCI board is in a quandary that arises, in part, from the crucial distinction between a merger and an auction, experts said.
The battle for MCI, based in Ashburn, Va., may even set legal precedents.
“This is a wonderful case for testing out whether courts are serious about giving boards the discretion they say they do,” said University of California at Los Angeles law professor Lynn Stout.
By calling its deal with Verizon a merger, MCI’s board is allowed to accept a lower price if the deal is in the best long-term interests of the shareholders.
But Denver-based Qwest and some observers say the process looks more like an auction, in which the highest bid must win, according to legal precedent.
If Qwest were to offer an all-cash bid that beat New York-based Verizon, MCI’s board would have to choose Qwest. But Qwest hasn’t done that and may not be able to raise the money to do so.
Here’s the wrinkle: Qwest’s $27.50-per-share offer for MCI is blurring the lines between a merger and an auction because it is $13.50 in cash and $14 in stock.
“If it went to more than 50 percent cash, it would be harder to call this a merger,” said John Coffee of the Columbia Law School. “Then it becomes an auction and the board must look simply at getting the highest price.”
There are other grounds for considering this an auction, because Qwest initially made an offer for MCI in February that was later trumped by Verizon.
“The fact that Qwest initiated the sale process means there is argument that auction rules should apply,” said University of Denver law professor Jay Brown.
Qwest chief executive Richard Notebaert made the auction argument in a letter Friday to MCI’s board: “The recent series of bids and counterbids make it clear this has become an auction in all but name.”
Verizon CEO Ivan Seidenberg on Monday described the Verizon-MCI merger as “the most sensible course for MCI and its shareholders.”
He claimed that Qwest seeks to raid MCI’s “balance sheet and use it as a financial lifeboat.”
MCI has $5 billion in cash. Qwest has $17 billion in debt.
MCI’s board says Verizon is a more financially secure company than Qwest, with better business prospects. MCI is already facing lawsuits from shareholders for accepting Verizon’s lower bids.
The single largest block of MCI shares belongs to hedge funds, which bought MCI’s debt when it emerged from the WorldCom bankruptcy, converted it into stock and is now calling for the MCI board to accept the highest bid.
Seidenberg also wrote Monday that Qwest’s deadline for an MCI decision by midnight tonight incites the short-term interests of hedge funds. “They should not be permitted to stampede the (MCI) board into a rushed decision,” he wrote.
Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.
Wall Street’s reaction
Closing stock prices for Qwest, MCI and Verizon on Monday:
Qwest 5%, Close: $3.82
MCI 0.8%, Close: $25.08
Verizon 1.3%, Close: $35.65
