Battle for MCI Heats Up
Last week Qwest upped its offer for MCI to more than $8 billion, topping Verizon's accepted bid of $6.75 billion (see Qwest to MCI: 'Pretty Please?'). Hammering home the point that a Qwest/MCI merger would achieve more synergy, get faster regulatory approval, and improve shareholder value, Qwest CEO Dick Notebaert says the offer for MCI is not a knee-jerk reaction to SBC Communications Inc.’s (NYSE: SBC) deal to acquire AT&T Corp. (NYSE: T), but a well thought-out plan that would give both companies strategic cost reductions across the board (see SBC to Buy AT&T for $16B).
Showing an estimated savings of $14.8 billion, Qwest executives stressed that a Qwest/MCI union would combine two networks with little competitive or geographic overlap, resulting in faster regulatory approval and greater competition in the market. “It’s important that we don’t end up with a duopoly,” Notebaert says. “Our offer provides for greater choice and more opportunity.”
But a lot of the cost savings outlined in the presentation would come from massive job cuts between the two companies. Qwest has estimated that between 12,000 and 15,000 positions would be eliminated from the combined workforce of about 81,000 workers. Verizon estimated it would cut 7,000 positions when it submitted its offer two weeks ago.
Even as Qwest does its best to convince MCI shareholders that its is a superior deal, questions remain about the value of such a combination. Verizon, with more than $71 billion in annual revenues, clearly has more available cash and a lower ratio of debt, factors that make its long-term prospects more attractive to MCI shareholders. Qwest, meanwhile stresses that it has reduced its debt by $10 billion, has more than $2 billion cash on hand, and is offering superior offer of $24.60 per share, compared to Verizon’s offer of $20.55 a share.
Much of Qwest’s current cost savings and debt reduction have come from reducing headcount. Notebaert says the company has “quietly reduced headcount by 21 percent over the past two-and-a-half years,” a statement that raises questions about the company’s supposed “strong” financial position.
Verizon, on the other side of the acquisition battle for MCI, has also taken the gloves off and has come out swinging, saying that a Qwest/MCI merger could result in less investment in MCI’s networks and Internet backbone, and harm national security-related customers. MCI’s network serves the U.S. Defense and Homeland Security departments, among others.
"We announced our plans to invest substantially in MCI's network and systems to continually upgrade those assets," Verizon Executive Vice President Tom Tauke said at a meeting in Florida yesterday. "Qwest has made no such commitments. They may even close MCI's Internet backbone and long-distance network, something that would result in less competition, more concentration, and fewer choices.”
Along with dissing Qwest’s investment ability -- and playing up Verizon’s estimated $3 billion in network upgrades -- Tauke also downplayed Qwest’s claims that it could get regulatory approval faster than Verizon. "Qwest will need approvals from essentially the same number of regulators," he says.
Qwest investors apparently liked what they heard this morning, driving the stock up $0.15 (3.23%) to $4.05 in afternoon trading. Verizon shares were also up $0.23 (0.64%) to $36.20.
— Chris Somerville, Senior Editor, Next-Generation Services