Suing MCI: Can you hear us now?Right-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet.
By
Al Lewis,
Business ColumnistRight-click here to download pictures. To help protect your privacy, Outlook prevented automatic download of this picture from the Internet.
Denver Post
Sunday, February 20, 2005


MCI will now have to explain its big snub of Qwest in court.

On Friday, MCI shareholders sued to halt the company's $6.75 billion sale to Verizon Communications Inc.

Qwest had offered to buy Verizon for nearly $8 billion - but Qwest CEO Dick Notebaert couldn't get MCI CEO Michael Capellas to return his phone calls.  Then last week, MCI accepted the substantially lower Verizon offer.

"We carefully examined both offers," MCI chairman Nicholas Katzenbach told The Washington Post.  He said the Verizon deal was better for financial and strategic reasons but would not elaborate.

Perhaps Katzenbach is a big fan of that Verizon nerd - "Can you hear me now?" - or maybe he doesn't want to see MCI become "McQwest."

Qwest has too much debt, it's the weakest Baby Bell, its business keeps declining amid new competition, it still faces untold liabilities from shareholders' lawsuits, and the company can't wipe the smell of former CEO Joe Nacchio off the walls of its headquarters building.

Verizon, by contrast, is bigger, better financed and odor-free.

But is all that enough to dismiss a bid worth at least $1 billion more?  Additionally, Qwest's merger bid offers MCI shareholders more cash and equity than does Verizon's.  And Qwest has said it will sweeten the terms of its bid.

MCI's board didn't look as carefully at Qwest's bid as Katzenbach claims, according to the shareholders' lawsuit filed in Delaware.  "After meeting for only one hour, on Sunday, February 13, 2005, from 8:00 p.m. to 9:00 p.m., MCI rejected Qwest's offer and agreed to accept Verizon's offer," the lawsuit states.

A frustrated Notebaert had already said as much.  After getting snubbed, he filed a letter to MCI with the Securities and Exchange Commission:  "We would like to remind you that the Qwest proposal is superior to the Verizon proposal."

The shareholders' lawsuit cites Notebaert's claims, as well as analysts who agree that the Qwest bid is better.  Additionally, Mexican billionaire Carlos Slim, who is MCI's largest shareholder, reportedly hasn't decided whether to back Verizon's bid.  So Qwest is still in the game.

MCI's Capellas stands to receive up to $9 million in bonuses following the Verizon deal, according to the lawsuit.  Capellas is rumored to be a potential replacement for fired CEO Carly Fiorina at computermaker Hewlett-Packard.

But what about the rest of the MCI team?  Perhaps they would prefer the Verizon bid because Verizon would keep them around longer.

The Verizon bid is a bet on a stronger company that may deliver more value to MCI shareholders in the future.  Qwest offers a more uncertain future, but its bid allows MCI shareholders to cash out now.

The pros and cons of these two scenarios are complicated.  Surely, it would take more than an hour to discuss them.

Qwest indeed is still struggling with its scandalous past - a fact that may have given MCI's board pause.  Former Qwest executive Marc Weisberg, 47, was indicted Friday for allegedly stuffing his pockets with vendor stock.  Nevertheless, it's hard to imagine a more scandalized company than MCI.

It's called MCI today because the company that once controlled it, WorldCom, stunk worse than Qwest.  WorldCom topped Enron as history's biggest accounting scandal and bankruptcy.  Its former CEO Bernie Ebbers is now on trial for fraud.

Presumably, in the aftermath, MCI took on a new management and board of directors beholden to the new paradigm of honest corporate governance.

You'd think MCI would be careful about its obligations to shareholders.  You'd think its board would spend more than an hour reviewing the Qwest bid.  And you'd think the board would offer a detailed explanation showing why the Qwest's bid was inferior.  But no.

The only way to get such explanation was for shareholders to sue.

MCI officials "have breached their fiduciary duties ... by depriving MCI's public stockholders of maximum value," the lawsuit alleges.

MCI's new officers and directors must be making old Bernie Ebbers proud.

Al Lewis' column appears Sundays, Tuesdays and Fridays. Reach him at 303-820-1967 or alewis@denverpost.com.