Qwest gives up on MCI
Denver telecom cedes bidding war to Verizon
By Ross Wehner, Denver Post Staff Writer
Tuesday, May 3, 2005

Qwest abandoned its three-month bidding war for MCI on Monday, shortly after MCI rejected it for the fourth time in favor of a lower bid from Verizon.

"It is no longer in the best interest of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the Denver-based phone company said in a statement.

Qwest's surrender came hours after Verizon raised its bid to $26 per share.  MCI accepted that bid over Qwest's $30-a-share offer.

Ashburn, Va.-based MCI gave several reasons for sticking with New York-based Verizon, including Verizon's financial strength, the potential defection of lucrative customers if MCI merged with Qwest and a lack of faith in Qwest's ability to achieve $3 billion a year in cost cuts.

But most important, MCI said it needs Verizon to compete with soon-to-be-merged telecom giants SBC-AT&T and Sprint-Nextel.

"MCI's board made a logical decision," said Richard Nespola, chief executive of the Kansas-based TMNG consulting firm.  "Verizon and MCI are a good groom and bride."

Other analysts said Qwest could still launch a hostile bid, even though a Qwest spokesperson termed the company's decision "final."

"Qwest is waving the white flag and whining at the same time," said Pat Comack, an independent telecom analyst.  "It doesn't make sense.  Qwest's departure gives ammunition to MCI shareholders to throw the board out."

MCI's largest shareholders, many of which are hedge funds bent on getting the highest possible price for their stock, were unhappy with MCI's move.

"Qwest should now deal directly with large shareholders," MCI shareholder Bruce Berkowitz said in media reports.  "I do not believe this is over.  The shareholders of MCI should band together and force the issue."

Qwest's top bid included nearly three times as much cash as Verizon's, making Qwest's bid even more attractive to the hedge-fund operators.

MCI shareholders could voice opposition to the Verizon-MCI deal at MCI's annual shareholder meeting May 16.  They could also vote the deal down at a special meeting on the merger in June or July.

Qwest and Verizon both approached MCI in July shortly after MCI emerged from the WorldCom bankruptcy.  MCI offers an international long-distance network and 60,000 large business clients.  Debt-laden Qwest was also eyeing MCI's $5 billion in cash on hand.

After news of a possible Qwest-MCI merger broke in February, Verizon stepped in and quickly won the MCI board's favor.

During the course of the ensuing bidding war, MCI chief executive Michael Capellas masterfully used Qwest to force Verizon to raise its bid by 25 percent.

Verizon's original bid was $6.75 billion. The new offer is $8.45 billion.

Qwest gained the upper hand for a short time April 23 when the MCI board embraced its $30-a-share offer.  But MCI quickly dropped Qwest on Monday.

Qwest will now focus its energies on what Qwest chief executive Richard Notebaert calls "Plan B," sources close to the company said.  That plan includes picking up overlapping assets that would be divested during upcoming telecom mergers, acquiring other companies and lowering Qwest's debt by selling some of its own assets.

Notebaert was not available for comment Monday.

Qwest will have to move quickly to compete in America's fast-consolidating telecommunications sector.

Qwest will face not only cable and wireless competition, but also competition from regional Bell operating companies such as Verizon and SBC, said Todd Rosenbluth, a Standard & Poor's analyst.

"We fear these companies will compete in Qwest's own markets," he said.

Some Qwest employees expressed relief that the bidding war was over, saying that it was clear that MCI didn't really want Qwest after rejecting it so many times.

Nelson Phelps, executive director the Association of U.S. West Retirees, expressed faith in Notebaert.  He also predicted Qwest would fight hard to combat the upcoming telecom mega-mergers.

Verizon-MCI "isn't a sure deal," he said.  "With the size and with SBC acquiring AT&T, Congress needs to look at antitrust in this case.  I think Qwest will raise that point."

Verizon will now work to win support from MCI shareholders, who will vote on its merger proposal this summer.  It is also moving to get regulatory approval in the U.S. and overseas.

MCI shares plunged 83 cents Monday to close at $25.70, a sign that short-term investors are already selling off MCI stock in anticipation of a Verizon victory. Qwest closed at $3.47, up 5 cents. Verizon closed at $34.97, down 83 cents.

Staff writer Ross Wehner can be reached at 303-820-1503 or rwehner@denverpost.com.

WHAT THEY'RE SAYING

"Qwest is waving the white flag and whining ... at the same time. It doesn't make sense."
- Independent telecom analyst Pat Comack

"The perception right now is that Qwest did it out of desperation."
- Analyst Donna Jaegers of Denver-based Janco Partners

"I think they did everything they could, and as Notebaert indicated, this was the last offer. It's not the end of the world."
- Nelson Phelps, executive director of the Association of US West Retirees