[March 29, 2005]

Verizon Makes Can�t-Refuse Offer for MCI

By David Sims, TMCnet CRM Alert Columnist

On March 28, the date Verizon set for MCI Inc. to give Qwest Communications International Inc. a yes or no answer to Qwest’s takeover bid, the result was… another deadline a week later.

Turns out that week won’t be necessary. The Associated Press is reporting that Verizon Communications Inc. is raising its offer for MCI Inc. by $1 billion, and the long-distance phone company is expected to accept the new $7.6 billion bid, rejecting a higher-priced proposal from Qwest Communications International Inc.

Qwest issued a new deadline to MCI yesterday, giving the long-distance telephone company one more week to decide if it will accept buyout proposal from Qwest which is, at least on paper, a far richer one than that being offered by Verizon Communications Inc., MCI’s other suitor.

According to the Associated Press news of the ultimatum, delivered in a letter to MCI’s board, also said Qwest Communications International Inc. lenders have committed an extra $500 million in financing to back the $8.45 billion bid, which is currently worth $1.9 billion more than the previous Verizon deal.

The new offer from Verizon increases the amount of cash being paid and provides protection against a decline in the value of the Verizon shares MCI investors will receive, according to reports Tuesday from CNBC and The Wall Street Journal, each citing unidentified sources.

Verizon agreed last week to give MCI until yesterday to meet with Qwest. Verizon has the confidence MCI will accept its bid over that of the far more financially unstable Qwest.

The new offer would value MCI at $23.50 per share, up from the $20.75 a share, or $6.75 billion, that Verizon originally agreed to pay when the companies stuck a deal in mid-February.

MCI’s board has shown little enthusiasm or urgency to discuss even the sweetened $8.45 billion bid Qwest submitted two weeks ago despite growing pressure from some MCI shareholders to consider the higher bid.

Denver-based Qwest has offered $26 per share for MCI, consisting of $10.50 in cash and Qwest shares worth $15.50. CIBC World Markets analyst Tim Horan told TheDeal.com that Qwest would offer as much as $28 per share, though he wrote in a report last week that Verizon could still prevail with a bid of $25. At press time, Verizon’s bid stood at $20.75.

Todd Rosenbluth of Standard & Poor’s pointed to the downside of loading a bid with cash, saying, “Every dollar that they’ve raised their offer has been cash that will not be used to run the business.”

At the end of 2004, Qwest had nearly $16.69 billion of long-term debts and just $1.77 billion in cash and liquid assets. The company lost $1.79 billion for the year as revenues fell 3.4 percent to $13.81 billion, generating just $1.85 billion in free cash flow from operations.

By contrast, although Verizon ended 2004 with long-term debts of $37.67 billion and just $4.55 billion of liquidity, its business generated $71.28 billion of revenue, net income of $7.83 billion, and $21.82 billion of cash.

On Feb. 14, MCI accepted a $6.7 billion takeover offer from Verizon, the largest telecom services provider in the U.S., after spurning a higher offer from Qwest. MCI’s board chose the Verizon offer because it judged the company a more attractive suitor than Qwest, the smallest of the remaining Bell telephone companies.

Verizon is under pressure to obtain a large long-distance network to maintain pace with rival SBC, which recently agreed to acquire AT&T for its network and stable of corporate clients.

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

To discover how contact centers can save money and increase productivity by making the switch to IP Telephony, be sure to attend TMC's IP Contact Center Summit May 24-26, 2005, in Dallas, Texas. IP Contact Center Summit is co-located with the Speech-World conference, where you can get expert guidance in the deployment of speech technologies to strengthen customer relationships.