MCI embraces Qwest's bid over Verizon's

WASHINGTON -- MCI Inc.'s board of directors on Saturday embraced a cash-rich offer from Qwest Communications International Inc. after months of saying the company was a financially weaker and strategically less desirable merger partner than Verizon Communications Inc.

The sweetened $9.74 billion deal, if finalized, could set the stage for dramatic changes at MCI, based in suburban Ashburn, Va. Qwest has said it would cut as many as 15,000 jobs and eliminate nearly $15 billion in costs from a combined company.

By comparison, the larger Verizon estimated it would cut roughly 7,000 jobs. About 4,000 of MCI's 41,000 employees are based in the Washington area.

In declaring Qwest's latest proposal "superior" to Verizon's current offer, the MCI board has not ended the process. Verizon has through Friday to up its ante, which sources familiar with the negotiations said is likely. Verizon's current bid for MCI is about $2 billion less than Qwest's.

Verizon officials said in a statement that they would consider all of their options in coming days. They maintained, as they have throughout the discussions, that merging with their company, even at a lower price, would better guard "the integrity of MCI's business, ensuring that MCI's customers have continuing access to the best communications services, retaining key employees, and stabilizing MCI's financial position and prospects."

The 10-week battle for control of MCI is one of a series of telecommunications deals that has started realigning the industry in favor of its bigger players. Companies that once specialized in selling local and long-distance phone service are banding together to better compete, as cellular and Internet-based technologies allow consumers to replace traditional carriers. Over time, analysts say, phone companies will need heft and scope to offer broader packages of goods and to effectively challenge the cable companies and others entering the phone business.

In January, MCI's biggest director competitor, AT&T Corp., agreed to be sold to SBC Communications Inc. for $16 billion; late last year, Sprint Corp. and Nextel Communications Inc. announced plans to merge for $35 billion.

MCI's desirability as a merger partner was in question only a few months ago. Under its previous name, WorldCom Inc., it weathered an $11 billion accounting scandal, a two-year bankruptcy, adverse regulatory changes and an implosion in the technology market that pared its business to nearly half of what it was at its height in 2000. MCI's consumer long-distance business continues to decline, but it retains a valuable corporate and government client base that has helped make it attractive to Verizon and Qwest.

In mid-February, MCI agreed to merge with Verizon, which is currently offering $7.65 billion in stock and cash for the company, or about $23.10 per share. That agreement stands until Verizon increases its bid or until MCI's board finalizes the offer from Qwest.

One source familiar with Verizon's strategy said a new bid could reach $25.72 a share, which is the same amount Verizon offered last week to Mexican telecom magnate Carlos Slim Helu to acquire his 13.4 percent stake in MCI. Although Qwest characterized its most recent price as a "best and final offer," telecom analysts agree that acquiring MCI is vital if the Denver company is to expand beyond its Western regional market and compete with giants such as Verizon.

In addition to the purchase price, Qwest would have to pay $250 million to break up MCI's agreement with Verizon.

Qwest, which protested loudly after MCI rejected its three previous offers, struck a celebratory tone Saturday.

"Qwest is gratified that MCI has recognized its superior offer for MCI," the company said in a statement. MCI Chief Executive Michael Capellas called his counterpart at Qwest, Richard Notebaert, to inform him of the board's decision Saturday morning. Following that conversation, Notebaert sent a message to Qwest employees informing them of the MCI board's decision.

"(T)hey concur with what Qwest has been saying for months about the great potential for synergies and success that would result from a Qwest-MCI combination," Notebaert said in the e-mail, a copy of which was obtained by The Washington Post. "We wouldn't be in the position today, to be considered a major, credible participant in our industry, without your efforts."

MCI's board for weeks set aside Qwest's higher bids, arguing that Verizon is a stronger company, with more resources, its own wireless unit, greater access to cash, and a network concentrated in the Northeast, where many of MCI's corporate customers reside. With more than $17 billion in debt, Qwest has been considered a weaker and riskier alternative, and MCI had said that many of its customers would likely defect following a deal with Qwest.

But Qwest's latest offer, equivalent to $30 a share in cash and stock, tipped the balance. The $30-a-share level had been mentioned by MCI board members in prior discussions with Qwest. In addition, Qwest assured MCI that it would follow through on the deal even if MCI's business continues to decline in coming weeks before the sale is completed.

Qwest also was helped when it secured $800 million in additional financing from some of MCI's big shareholders, many of whom are hedge funds that favor Qwest's higher bid.

"MCI's board had no choice; they are bound to do what's best for shareholders, not employees, not customers and not creditors," said Patrick Comack, an analyst with Zachary Investment Research in Miami. If Qwest can cut costs as deeply as promised, it could be a good deal for shareholders, he said, "but MCI is better off with Verizon in terms of financial firepower."

Any deal will have to pass muster with regulators and MCI shareholders. Verizon has already filed for regulatory approval in many states and could hold a vote among MCI shareholders as early as June. In its statement Saturday, Qwest said it would quickly file for regulatory approval if MCI's board finalizes an agreement.

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