[March 17, 2005]

The Continuing MCI-Verizon-Qwest Saga

By David Sims, TMCnet CRM Alert Columnist

“Notebaert” doesn’t sound like an Irish name, but Qwest Chairman and CEO
Richard C. Notebaert must be counting on some of the luck o’ the Irish this St. Patrick’s Day to wrest MCI away from Verizon’s embrace.

Verizon is acting like a suitor whose ring is already on the lady’s finger. In a letter filed Wednesday with the U.S. Securities and Exchange Commission, Verizon chairman Ivan Seidenberg ridiculed Qwest’s frantic attempts to win MCI and its estimate of achieving $1.7 billion in savings in the first year after its acquisition of MCI.

MCI herself has had a bit of mud splashed on her dress. The Kansas City Star is reporting this morning that MCI has found a “material weakness” in its controls for income-tax accounting, revealing that it had a wider loss for the fourth quarter of 2004 than previously reported because of a tax-related error.

According to the Star the Ashburn, Va., phone company, which filed for bankruptcy protection in 2002 after an $11 billion accounting fraud, said in a Securities and Exchange Commission filing that it has taken steps to improve its tax accounting. It attributed the error to the complex tax questions that arose in connection with its emergence from Chapter 11 bankruptcy last year and its restatement of past financial reports that were marred by fraud.

Undaunted, Verizon contined to thumb its nose at Qwest. “Mergers in the long-distance segment of the telecom industry predicated upon the promise of huge synergies have resulted in spectacular failures,” wrote Seidenberg, referring to WorldCom’s acquisition of MCI in 1998 that led to an $11 billion accounting scandal.

Yesterday Notebaert retorted “Our activities over the next 24 hours will demonstrate our commitment to winning MCI. It is unfortunate that some in the process feel MCI shareholders should be deprived of the true value of their asset. MCI is a valuable property and shareholders deserve the present and future value that Qwest is committed to deliver. Historical commentaries serve no purpose as we look to the future of the communications sector and foster competition.”

Accordingly, this morning the Denver Post is reporting that Qwest will up its offer for MCI by nearly $500 million in cash in an attempt to derail rival bidder Verizon, a source close to the situation told the Post Wednesday evening.

The sweetened offer would come to about $8.5 billion, up from the $8 billion in stock and cash the Denver-based phone company has on the table.

MCI, the nation’s second-largest long-distance provider, has accepted a $6.75 billion offer from telecom giant Verizon.

Under pressure from shareholders to get a higher price, MCI’s board received Verizon’s permission two weeks ago to reopen talks with Qwest. Talks were scheduled to last until today.

Qwest’s stock continued its five-week slide Wednesday even as reports circulated of its increased bid. 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 increased 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.

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.”

Analysts still expect a Verizon-MCI wedding. “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.”

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