Verizon Announces MCI Acquisition

Byline: Yuki Noguchi, Ben White and Fred Barbash

Verizon Communications Inc. announced this morning that it has agreed to buy MCI Inc. in a deal it valued at $6.7 billion in cash, stock and dividends.

The merger comes amid a rush to consolidate in the telecommunications industry that has seen SBC Communications Inc. agreeing to acquire AT&T Corp. and Sprint Corp. agreeing to buy Nextel Communications, Inc.

The boards of Verizon and MCI have approved the acquisition, which requires shareholder as well as regulatory approval. The company, in a statement, said it expects approval to take about a year.

MCI Inc. board members accepted the offer last night after rejecting a sweetened and higher bid from Qwest Communications International Ltd., sources close to the negotiations said. Qwest, the rejected suitor, could attempt to challenge the Verizon-MCI deal.

Ashburn-based MCI, which was founded in Washington and traces its lineage to Microwave Communications of America Inc. in 1968, was known for pioneering competitive long-distance calling options in the 1980s.

The company also owns an Internet network that carries a large part of the world's online traffic.

Among the reasons that MCI accepted a lower bid, sources said, was that Verizon is considered a better strategic fit and a more financially stable company than Qwest, and thus offers better long-term value to MCI shareholders.

"It is a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies," Verizon Chairman and CEO Ivan Seidenberg said in a written statement. The acquisition, he added, "accelerates Verizon's growth plan in the enterprise market, and it facilitates our becoming a major provider sooner and less expensively than if we had continued on a path of organic growth."

Company officials said the agreement would result in about 7,000 job cuts from the combined work force of about 250,000 employees, the Associated Press reported.

According to this morning's announcement, MCI shareholders will receive 0.4062 shares of Verizon stock for each share of MCI. Based on Verizon's closing price Friday of $20.75, Verizon put the take at $14.75 per share for MCI shareholders for a total value of $4.795 billion.

In addition, MCI shareholders will receive $1.75 per share in cash (worth $488 million) and a quarterly and special dividend payout of $4.50 per share, worth a total of $1.463 billion.

Verizon shareholders, according to the company, will feel the deal in a dilution of about 10 cents on earnings per share, although the statement said it should become a "breakeven" transaction in about three years.

Qwest's increased offer, made late Friday, came in the form of cash and stock, and was intended to top a Verizon bid made last week matching Qwest's previous offer of about $6.3 billion, sources close to the deal said. That deal would have given MCI shareholders about half the ownership in a combined company.

New York-based Verizon, meanwhile, offered $6.3 billion in stock as well as dividend payments to MCI shareholders, a source close to that deal said. Talking by phone and e-mail, the executives at Verizon and MCI spent yesterday negotiating the deal.

Both companies had been talking to MCI since late last year, but had escalated talks in the past month after SBC Communications Inc. announced its intention to acquire AT&T Corp. for $16 billion.

A merger was considered critical for MCI, formerly known as WorldCom, because it otherwise cannot compete with much larger companies that offer a broader breadth of technologies and services, according to analysts.

The company has privately discussed selling itself for about a year, during which it has been rapidly losing revenue in its consumer and international wholesale divisions. It also dealt with the fallout of a massive accounting scandal and a subsequent Chapter 11 bankruptcy reorganization. Both Verizon and Qwest were interested in MCI because of its business-customer base, which consists of about 10,000 large companies with longer-term contracts that generate most of MCI's profit.

The acquisition by Verizon, if consummated, would mark the end of MCI's legacy in the Washington area, where the company built its business as a consumer long-distance company in the 1980s, then bought its way into providing Internet services through the tech boom of the 1990s. One of its most successful marketing programs was its "Friends and Family" ad campaign introduced in the early 1990s. The program offered discounts of 20 percent to customers for helping their families sign up for long-distance service.

The telecom company counts many local executives and entrepreneurs among its alumni and is a major employer in the area, with 41,000 total employees and 4,000 local workers.

The company disclosed the accounting fraud in June 2002 and filed for Chapter 11 bankruptcy protection later that year. Its former chief executive, Bernard J. Ebbers, 63, is on trial. Prosecutors have charged him with securities fraud, filing false documents with the Securities and Exchange Commission, and conspiracy to inflate WorldCom's financial results.

Denver-based Qwest wrestled with its own accounting problems and was in a weaker financial position than Verizon. Last year, Qwest paid $250 million to settle its case with the Securities and Exchange Commission. It still faces investigations by the Justice Department, and the SEC continues to investigate former Qwest executives. The company has $17 billion in debt and $1.8 billion in cash, so it would likely have had to borrow money to acquire MCI.

Analysts have said Qwest was a weaker partner for strategic reasons. It did not own its own wireless network, which was considered critical for growth in the telecom industry. It also serves a primarily rural, 14-state region where there are few business centers, so a marriage with MCI would not likely result in as many cost efficiencies.

Verizon, meanwhile, owns a 55 percent stake in Verizon Wireless and is the primary phone provider serving 40 percent of the nation's population.

Although Verizon is the strongest among the regional phone companies, it faced a difficult task of determining whether it would be cheaper to build its own corporate client base, rather than buy MCI's, analysts said. With most of MCI's business going away or under attack from stiff competition, some said it could have been more effective for the company to build its own roster of customers.

COPYRIGHT 2005 Washingtonpost Newsweek Interactive
COPYRIGHT 2005 Gale Group