A Campaign to Derail Verizon-MCI Deal 
By Andrew Ross Sorkin and Ken Belson
New York Times
Wednesday, June 15, 2005

The fight for MCI, the long-distance carrier, may not be over yet.

A large hedge fund said yesterday that it planned to mount a campaign against Verizon's $8.5 billion takeover of MCI, hoping to coax Qwest Communications International into reviving its previous offer for the company.

Matthew Halbower, a portfolio manager at the hedge fund, Deephaven Capital Management, said the fund would file a request with the Securities and Exchange Commission seeking permission to solicit votes from MCI's shareholders against the Verizon-MCI deal.

If the fund, which is based outside of Minneapolis, gathered enough votes to block the takeover, Mr. Halbower said it might then seek to replace the MCI board.

MCI shareholders are expected to vote in the summer on the proposed deal with Verizon.

Deephaven's gambit follows a hotly contested three-month battle for MCI in which the chief executives of Verizon and Qwest traded barbs, and investors lobbied publicly for more money.

After having its offer rejected by MCI's board at the beginning of May, Qwest finally withdrew its offer. The company has since filed complaints with federal and state regulators charging that the Verizon-MCI deal and the proposed merger of SBC Communications and AT&T would create two industry behemoths that would squeeze out rivals.

The chief executive of Qwest, Richard C. Notebaert, has said that his company is no longer pursuing MCI.

But a person with knowledge of the decision-making inside Qwest said the company would closely watch Deephaven's efforts.  If the fund succeeded in blocking the Verizon-MCI deal, Qwest might return to the negotiating table, the person said.

A Qwest spokesman, Tyler Gronbach, declined to comment.

With Qwest's chief executive publicly rejecting the possibility of making another run at MCI, it is unclear how the MCI shareholders will greet Deephaven's campaign.  Last month, only 30 percent of MCI's shareholders withheld their vote in support of the company's directors.

Mr. Halbower of Deephaven said that if Qwest showed interest in reviving its bid, worth $9.8 billion at the time it was withdrawn, MCI shareholders would be encouraged to reject the Verizon-MCI agreement.

"If Qwest doesn't come back by a week before the Verizon vote, Deephaven is going to lose spectacularly," Mr. Halbower said, adding that his fund holds about 16 million MCI shares.  "But if Qwest does come back, Deephaven strongly believes it would be successful."

Beyond pushing Qwest to renew its bid, Deephaven could also benefit if Verizon - sensing that shareholders might reject its deal with MCI - raised its bid further.

Verizon, which already owns 13.4 percent of MCI, appeared confident that that would be unnecessary because it had enough support for its deal.

"We have a signed agreement with MCI and we expect soon to have a final proxy out to MCI shareholders," a Verizon spokesman, Peter Thonis, said.  "Some investors have been consistently vocal about their views of the transaction, so there is really nothing new here."

MCI also said that its board acted appropriately in approving the merger with Verizon and that it did not expect any delays.

"The regulatory approval process is well under way and we are looking forward to our upcoming shareholder vote," an MCI spokesman, Brad Burns, said.

Deephaven, which has never mounted a contest of this sort, has large stakes in MCI and Qwest.  The fund said it owned nearly 5 percent of MCI's stock, worth about $408 million, and almost one million shares in Qwest, worth an estimated $3.7 million.

Deephaven also owns about $190 million in MCI debt and another $80 million in bonds from Qwest.

Shares of MCI rose 3 cents, to $25.49.  Shares of Qwest fell 4 cents, to $3.68, while Verizon's stock rose 10 cents, to $35.01.