[February 14, 2005]

MCI: Verizon’s Valentine

By David Sims, TMCnet CRM Alert Columnist

Spurning rival suitor Qwest’s larger offer, MCI agreed to be purchased by Verizon in yet another telephone industry merger.

Qwest offered more money, about half a billion dollars more, but MCI Corporation, the nation’s #2 long-distance carrier, agreed to be purchased by Verizon Communications Inc. in a massive $6.8 billion deal.

Terms were reported as Verizon paying $4.795 billion worth of its stock and $488 million in cash for MCI’s shares. In addition, MCI shareholders will be paid dividends worth $1.463 billion.

Verizon, the largest regional phone company in the United States needs MCI to morph into a major international carrier and corporate service provider. Some analysts are saying that while it’s a great deal for Verizon’s side of the table, it’s a St. Valentine’s Day Massacre for those carriers left out in the cold.

“For Verizon, this deal represents a ‘Why not?’ strategy. With significant financial security, Verizon can easily pull this deal off,” Ben Silverman, telecom analyst for investment newsletter FindProfit.com told Reuters. “The deal cements Qwest’s place as an ‘also-ran’ and ‘has been’ in the telecom arena.”

The deal is worth less than half the recent blockbuster merger between another #1 and #2 two weeks ago, No. 2 regional provider SBC Communications and No. 1 long-distance company AT&T, which cost approximately $16 billion.

The agreement puts MCI, which recently changed its name from WorldCom Inc. after emerging from bankruptcy and a huge financial fraud, back on solid financial footing. Although Qwest offered more money, Verizon’s widely regarded as a much more solid company, better able to pay the asking price.

Given Verizon’s geographical area in the heavily populated Northeast and its huge cellular operations, it’s seen as more viable long-term than Qwest, the local phone carrier across the more sparsely populated Rocky Mountains and Pacific Northwest.

AT&T and MCI also have attractive lists of residential customers for SBC and Verizon, both of whom are rolling out cable TV services later this year. According to published reports both SBC and Verizon are investing billions to upgrade their networks to deliver video and interactive services.

There’s still some slippage possible. Executives at both companies have okayed the deal but the shareholders still need to sign off – and what if Qwest sweetens their bid? And given the current state of the telecom industry nobody’s sure whether federal regulators are going to give the thumbs-up or down.

The deal values MCI’s stock at $6.75 billion, or $20.75 per share — equal to Friday’s closing price on the Nasdaq Stock Market. In pre-market trading Monday, MCI’s shares sank 75 cents.

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