The deal follows SBC Communications’ $16 billion acquisition of former parent AT&T earlier this month, a move that continues to have impact across the US communications landscape. The deal immediately led to speculation over MCI’s future, and it wasn’t long before Qwest publicly announced that it had submitted a $6.3 billion offer to buy MCI.
However, MCI remained remarkably non-committal on the takeover offer, because behind the scenes it was talking to both Qwest and Verizon. Talks between MCI and Verizon have apparently been ongoing for four to six months.
Matters were brought to a head this weekend, when Verizon matched Qwest $6.3 billion offer. Qwest then increased its bid to $7.3 billion, but on Sunday evening, MCI’s board decided to accept Verizon’s improved cash and stock offer of $6.75 billion.
MCI’s reasons for choosing Verizon over Qwest has not been revealed, but some have speculated that MCI had concerns over Qwest’s $17 billion debt pile, its ability to raise cash, and its less attractive shares. Additionally, Verizon is by far a bigger player with a stronger financial position, although its debt pile was nudging $39.3 billion at the end of 2004.
Under the terms of the deal, Verizon will pay $4.8 billion in stock and options, and $488 million in cash. In addition, MCI will give its shareholders a special dividend of $4.50 a share, which is worth $1.46 billion. This brings the total value of the deal to $6.75 billion, or $20.75 a share. Verizon will also assume MCI’s net debt of $4 billion.
The deal values MCI at a slight premium to its $6.6 billion market value on Friday, and is subject to approval at a shareholder meeting in May. Verizon shareholder approval is not required, and the deal is expected to close in one year’s time.
There is also a sting in the tail, as there is a $200 million breakup fee if the deal doesn’t go ahead. The purpose of this fee is to act as a deterrent for any MCI shareholders hoping that Qwest will come back with a better offer.
Theoretically speaking, Qwest could press its case with MCI stockholders arguing its bid is higher, but with both the board of MCI and Verizon having signed off on the deal, Qwest would face an uphill struggle to convince stockholders to dump Verizon.
During a conference call to discuss the acquisition, Verizon’s CEO Ivan G Seidenberg described the deal as straightforward, simple and smart. It will give Verizon entry into the market serving large corporations. MCI’s business customers and its Internet and data business, is what attracted Verizon, rather than MCI’s more than its traditional consumer long-distance service.
The reason for this is that both Verizon and rival SBC have been trying to force their way into the business communications market. They have achieved success in the small- to mid-sized customers, but large corporations do not often change their telecommunications providers, and despite their problems over the years, AT&T and MCI have managed to retain their hold on these valuable clients.
The other attractive asset of AT&T and MCI has been their wide-ranging national and international networks. MCI operates over six continents in 140 countries around the world. It also operates the largest Internet backbone in the world, with over 4,500 pops (points of presence).
Yet all mergers come with a price. According to Verizon’s CFO Doreen Toben, the deal will lead to cost savings of $1 billion a year from the third year, and approximately 7,000 employees at MCI are expected to face the axe, mainly from IT and support functions.
Analyst reaction to the deal has been mixed. Some don’t like the deal, in the same way they didn’t like the SBC and AT&T deal, as it means lower margins, declining revenue growth, and less wireless exposure. However, others point out that Verizon is paying a lot less than AT&T’s $16 billion asking price, and that Verizon needed to respond to SBC’s bid for AT&T in order for it to be competitive going after large business customers.
