[March 21, 2005]

Analysts Weigh In on MCI Purchase

By David Sims, TMCnet CRM Alert Columnist

On the face of it, Qwest has a better offer for MCI than Verizon – $8.45 billion versus Verizon’s $6.7 billion offer.

So what’s the problem?

The problem is that analysts simply don’t see Qwest’s numbers as realistic. “Qwest is not going to win this battle,” Ivan Feinseth, director of research at Matrix USA in New York told the Denver Post. “They don’t have the money to make this deal.”

Verizon has a market capitalization of $98.3 billion and reported revenue of $71.28 billion last year. Qwest has $7.6 billion in market cap but more than twice as much -- $17.3 billion -- in debt. Qwest's 2004 revenue was $13.81 billion.

Verizon Chairman Ivan Seidenberg ridiculed Qwest’s math in arriving at an estimated $2.8 billion in annual savings by eliminating duplicate facilities and jobs and by consolidating advertising and improving purchasing power. In a letter to MCI Chairman Nicholas Katzenbach and President and CEO Michael Capellas last week Seidenberg called Qwest’s numbers “financial alchemy.”

Seidenberg also wrote to the U.S. Securities and Exchange Commission, noting, “Mergers in the long-distance segment of the telecom industry predicated upon the promise of huge synergies have resulted in spectacular failures,” referring to WorldCom’s acquisition of MCI in 1998 that led to an $11 billion accounting scandal.

Qwest’s sweetened offer would come to about $8.5 billion, up from the $8 billion in stock and cash comprising the Denver-based phone company’s previous offer. Verizon has shown no inclination to raise their bid.

MCI, the nation’s second-largest long-distance provider, has accepted Verizon’s $6.75 billion offer. But under pressure from shareholders to get a higher price, MCI’s board received Verizon’s permission two weeks ago to reopen talks with Qwest.

Analysts say Wall Street is increasingly pessimistic that Qwest, saddled with $17.3 billion in debt, can win a bidding war against Verizon, a much larger and more financially secure competitor. Qwest’s latest bid amounts to $26 per share. Sources say the cash component will range from $10.50 to $11 a share, and the stock component will be between $15 and $15.50 worth of Qwest stock.

Naturally MCI shareholders want to follow the money. Leon Cooperman, who owns 3 percent of MCI shares, said MCI’s closing price Wednesday of $23.75 proves that Verizon’s offer is not sufficient. “The market has told you that Verizon’s offer of $20.75 doesn’t work,” Cooperman said. “The board will have to review Qwest’s offer.”

But as News Factor has noted, “ the trick now for Qwest is to convince MCI that teaming up with a 14-state local phone company that serves Nebraska and Iowa is a better deal over the long term than linking up with bigger, richer Verizon, the biggest phone company in the northeastern United States.”

In other words, it’s one thing for this reporter to offer a young lady a life of wealth and ease should she marry him; it’s another thing for Bill Gates to do so.

David Sims is contributing editor and CRM Alert columnist for TMCnet.