Suing MCI: Can you hear us now?
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
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
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
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
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