MCI’s board rejected Qwest’s $8.9 billion takeover bid late Tuesday night in favor of a lower bid from Verizon.
The move means Qwest must either abandon its pursuit of the Ashburn, Va.-based long-distance provider or launch a hostile takeover.
“Qwest is weighing its options,” said Qwest spokeswoman Claire Mylott. “Shareowners will help dictate the next step in the process.”
MCI is expected to call a shareholder vote in June or July to approve a $7.5 billion merger deal it signed with New York-based Verizon last week.
Qwest has hired a proxy solicitation firm and could lobby MCI shareholders to defeat the Verizon deal at that meeting.
“That would force the board’s hand,” said Donna Jaegers of Denver-based Janco Partners.
A group of MCI’s largest shareholders has indicated it would support Qwest in a proxy fight if MCI’s board accepted Verizon’s lower offer.
“If the latest Verizon offer is presented to shareholders for approval, we intend to vote against it,” said Legg Mason Capital Management chief executive Bill Miller in a letter on Tuesday. The company controls nearly 2 percent of MCI stock.
Tuesday night marked the third time that the MCI board has rejected a lower Qwest bid in favor of Verizon, a larger and more financially secure company.
Verizon and Qwest have been battling for MCI, formerly known as WorldCom, which has an international telecommunications network and a rich portfolio of corporate clients. MCI prefers Verizon, which has a lucrative wireless business and a market value of $99 billion. Qwest is worth $7 billion and has $17 billion in debt.
Denver-based Qwest’s bid was $27.50 per share, about half stock and half cash. Verizon’s $23.10-per-share offer was 20 percent lower and only about a third cash.
At least one investment bank, Credit Suisse First Boston, concluded Tuesday that Qwest’s bid was “superior” to that of Verizon.
A number of experts, however, have said that Qwest could not afford to win its $8.9 billion bid for MCI.
Qwest’s offer is more than five times the value of MCI’s earnings before income taxes, interest, depreciation and amortization, or EBITDA. That’s a perilously high amount for a company with $17 billion in debt, said independent telecom consultant Tom Friedberg.
In comparison, SBC has agreed to pay less than four times the same measure of cash flow for AT&T, a bigger and stronger company than MCI.
“If they win this, they have overpaid,” Friedberg said of Qwest. “Qwest is effectively getting itself deeper into debt.”
James Cramer, a business columnist with TheStreet.com, attacked Qwest’s bid in a recent column that was written as a memo to Verizon CEO Ivan Seidenberg.
“Let them pay $28 smackers per share. They don’t have the money. In two years, Qwest will be bankrupt after that acquisition and you’ll be able to buy both for the price of one,” he wrote.
Cramer and others have called Qwest, which is struggling to compete against much larger telecommunications providers, desperate to make a deal.
Qwest said it expects to spend $2.7 billion to upgrade and merge MCI’s billing and network systems with its own. It plans to consolidate as many as 70 different MCI systems to gain about $2.9 billion in annual cost savings. Part of the savings would come from layoffs estimated at 12,000 to 15,000 workers.
MCI, the nation’s second-largest long-distance carrier, grew through a series of acquisitions that left it with a patchwork of fiber networks, billing and other systems.
Some expect the task of consolidation to be harder, and more costly, than Qwest has predicted.
“The magnitude … appears challenging,” Credit Suisse First Boston analyst Ido Cohen said in a recent research note.
Cohen and his fellow CSFB researchers also suggest that many of MCI’s customers might be reluctant to have their data and voice traffic moved to another network.
Verizon has offered different cost-savings from an MCI merger: $1.2 billion annually. Verizon’s estimate on integration investment is about the same as Qwest’s at $3 billion.
But Verizon predicts it will have to integrate more than 100 systems, which is more than Qwest has suggested.
Anatomy of a takeover bid
Early February: Qwest and MCI reportedly discuss a $6.3 billion takeover deal.
Feb. 14: Verizon wins bidding to acquire MCI for $6.7 billion.
Late February: Qwest renews failed bid for MCI, saying it offered $8 billion; Qwest publishes details of bid and meets with MCI investors to gain their support.
March 2: Verizon allows MCI to discuss Qwest’s bid over next two weeks.
March 17: Qwest raises bid to acquire MCI to nearly $8.5 billion.
March 28: Qwest sets deadline of midnight April 5 for MCI to take or leave offer.
March 29: MCI accepts a new, sweetened Verizon bid of $7.64 billion.
Thursday: Qwest bumps its bid to $8.9 billion.
Monday: Verizon threatens to withdraw its offer if the MCI board decides that Qwest’s bid is “superior.”
Tuesday: MCI rejects Qwest’s latest bid.
Sources: The Associated Press; Bloomberg News
STAFF AND WIRE REPORTS
Key players: the chief executives
Richard Notebaert, Qwest
Richard Notebaert, 57, has pulled Qwest from the brink of bankruptcy since taking over as chief executive in June 2002.
Notebaert joined Wisconsin Telephone Co. in 1969, which later became part of Ameritech. He worked his way through the ranks to become the chairman and chief executive of Ameritech in 1994.
After selling Ameritech to SBC Communications for $72 billion in 1999, he retired for less than a year, then joined Tellabs as chief executive in 2000.
He took the helm at Qwest when the company became mired in an accounting scandal and was under investigation by the Securities and Exchange Commission and Department of Justice.
Notebaert sold assets to help whittle down Qwest’s $26 billion debt to $17.2 billion. He settled an SEC suit alleging fraud by the company under former CEO Joe Nacchio for $250 million.
In recent months, he has waged a feisty campaign to acquire MCI.
Michael Capellas, MCI
Michael Capellas, 50, was brought in to rescue bankrupt and scandal-plagued WorldCom in November 2002 after serving as Compaq Computer chairman and CEO.
One of the first things he did was change the company’s name to MCI and move the corporate headquarters from Mississippi to Virginia. MCI merged with WorldCom in November 1997, creating MCI WorldCom. In 2000, the company was renamed WorldCom.
Capellas is a 30-year veteran of the information technology business and has experience fixing ailing companies and selling them off. He sold Compaq to Hewlett-Packard in a 2002 deal valued at an estimated $19 billion.
Capellas joined Compaq in August 1998 as chief information officer. Before that he held senior positions at Oracle and at SAP America. He began his career at Republic Steel Corp., where he held various systems analyst and manufacturing jobs.
Ivan Seidenberg, Verizon
Ivan Seidenberg, 58, who has more than 30 years in the telephone industry, is no stranger to high-stakes mergers.
As CEO of Bell Atlantic he was involved in its merger with NYNEX in 1997 and then Bell Atlantic’s merger with GTE, a deal that formed Verizon in 2000.
Verizon is the country’s largest phone company, a behemoth with a $99.2 billion market capitalization that provides service in 29 states and Washington, D.C.
Under Seidenberg, Verizon is racing to grab customers from cable companies, and plans to launch a broadband video service this year.
Seidenberg, who began his career as a cable splicer’s assistant, is a familiar presence in Washington, where he has urged Congress and the Federal Communications Commission to loosen the regulations that have bedeviled the Bells.
STAFF WRITER TOM McGHEE
