Verizon's Quest For MCI Tops Qwest

Verizon Communications Inc. is acquiring MCI Corp. for $6.75 billion, a swift response to the acquisition of AT&T Corp. by SBC Communications Inc. and the third big telephone industry merger in two months.

The agreement announced Monday, scuttling a competing bid for MCI by Qwest Communications International Inc., will result in about 7,000 job cuts from the combined Verizon-MCI work force of about 250,000 employees.

The purchase price was about a half billion dollars below what Qwest offered for MCI, which recently changed its name from WorldCom Inc. after emerging from bankruptcy and a huge financial fraud.

Verizon, the dominant local phone company in the Northeast and a top cellular player, likely won MCI's favor because it is larger and in better financial shape than Qwest, the local phone carrier across the more sparsely populated Rocky Mountains and Pacific Northwest.

"MCI is one of just a few beachfront properties you'd want to see, so it would be crazy not to keep our eyes out," for a company with assets like this up for sale, Ivan Seidenberg, Verizon's chairman and chief executive, said in a conference call with investors Monday morning.

"MCI was always the prize that Verizon looked at, because the assets were so complimentary to the national network and Internet backbone," Ben Silverman, telecom analyst for FindProfit.Com, an investment newsletter, said. "For Verizon, it gives the company a great set of national assets. It allows the company to better focus on targeting business customers, such as Fortune 500 companies and the federal government."

Telecommunications technology was a major reason for the deal, Verizon spokesman Eric Rabe told CBS Radio News.

"The technology is causing our customers to demand a whole different set products and services from us," Rabe said. "This acquisition of MCI is in large part a reaction to that situation."

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. But after rising 12 percent in two weeks amid speculation fueled by the SBC-AT&T deal, MCI's shares fell $1.06, or 5.1 percent, to $19.69 in Monday's early trading.

Under the agreement, Verizon will pay $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 is also assuming MCI's debt, expected to total $4 billion at closing. The companies estimated that merger transition expenses will total up to $3.5 billion over three years after the deal closes, but that cost-cutting from redundant operations will yield about $1 billion per year in savings starting in the third year.

The deal is subject to MCI shareholder approval and requires regulatory approval, which the companies hope to get in about a year.

The deal comes some two weeks after a $16 billion deal reached between AT&T and SBC, a top rival for both Verizon and Qwest.

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

MCI investors are said to have reacted poorly to the prospect of being paid with shares of stock in Qwest, a company marred by its own accounting scandals and a more questionable future.

The buyout marks an abrupt change of direction for Verizon, which just two weeks ago dismissed the notion it needed to respond to either an SBC-AT&T deal or the merger agreement between Sprint Corp. and Nextel Communications Inc. in December.

The three recent mergers would reduce the U.S. telecom industry to five dominant players — Verizon, SBC, BellSouth Corp., Sprint and Qwest — though the cable TV industry has begun to emerge as serious threat on the consumer side with the accelerating rollout of telephone service.

"It's never good when there's one less competitor. However, for consumers, there's really not going to be much of a difference here," Silverman told CBS Radio News.

"For the average residential telephone customer, there's very little impact here," agreed Rabe. "Today, we have many competitors in that business, and there are more and more of them every day."

Analysts and investors widely expected that Verizon would realize the need to counter the competitive advantage SBC will gain with AT&T despite that company's rapidly shrinking business.

And though many said New York-based Verizon would have preferred to wait before cutting a deal, or possibly even bid for Sprint instead, the company apparently decided it needed to act once Qwest made its play for MCI.

MCI's business isn't as large as AT&T's, but its network would give Verizon a national footprint with which to serve large companies hesitant to trust their communications to a regional service provider. MCI also would jump-start that effort with its base of corporate clients and an established sales force.

On the consumer side, AT&T and MCI also bring a big base of residential customers to whom SBC and Verizon would like to market the cable TV services they plan to roll out starting later this year. Both SBC and Verizon are investing billions to upgrade their networks to deliver video and interactive services.

MCI, based in Ashburn, Va., emerged from bankruptcy last spring after a multibillion-dollar accounting scandal which nearly destroyed the company.

Former chief executive Bernard Ebbers is currently being tried on criminal charges in the fraud, which boosted the profits WorldCom reported by hiding billions of dollars in expenses and inflating revenues.

The company, once worth $180 billion on the stock market, wiped away most of its debt in the bankruptcy reorganization.

But a combination of price wars, unfavorable regulatory changes, and competition from cell phones and Internet-based calling made it unlikely the company could survive on its own for the long term, so Capellas immediately began shopping the company around to prospective buyers.