Takeover Talks Take Over

As merger talks between Qwest Communications International Inc. (NYSE: Q) and MCI Inc. (Nasdaq: MCIP) become more serious, industry sources and news reports say Verizon Communications Inc. (NYSE: VZ) has now entered talks with MCI and is kicking the tires at Sprint Corp. (NYSE: FON). Verizon's motivations, in both cases, may be more than just defensive.

Analysts say that Verizon’s arrival on the scene is no surprise, and could be considered “fiduciary responsibility” when a potential acquisition candidate, here MCI, has clearly shown itself to be in play. It also seems incumbent upon Verizon to make sure that Qwest doesn’t get too good a deal on MCI -- a little talking by Verizon now could put upward pressure on the material terms of any Qwest/MCI merger that may materialize.

But Verizon is a far bigger player than Qwest, with a $99 billion market cap, compared with Qwest’s $7.53 billion. Qwest’s footprint covers roughly 10 percent of the population, whereas Verizon’s covers two thirds. As such, Verizon is not likely to expend too much energy on playing spoiler to a Qwest/MCI agreement, analysts say.

Verizon, too, has started a due diligence process with Sprint, according to a report this afternoon in TheStreet.com. That publication says Verizon is in the "fact finding and information-gathering stage, with no formal discussions under way." There is indeed reason to believe that Verizon’s intentions are serious, that it could realize real benefits from an MCI or Sprint acquisition. And, of course, that reason leads straight back to the recently announced merger of SBC Communications Inc. (NYSE: SBC) and AT&T Corp. (NYSE: T).

“SBC and AT&T has been unexpectedly well received by the market," says Buckingham Research Associates analyst Qaisar Hasan. “And the deal has relatively favorable terms."

Hasan says Verizon could probably achieve similar synergies by acquiring a company like MCI, and these would be realized in Verizon’s enterprise business.

“If Verizon wants to be the kind of enterprise player that SBC will now be, it would make a lot of sense for them to go after MCI," says analyst Tavis McCourt of Morgan Keegan & Company Inc. “They could move into that market much faster than they could with their home-grown service.”

In terms of its enterprise business, a combined SBC/AT&T can be seen by Verizon as a clear threat. “Now that SBC has AT&T, it will be targeting enterprise customers in Verizon’s Northeast territories,” Buckingham’s Hasan says. “Verizon would like to be able to come to those customers and say, ‘We have just as good an enterprise solution and just as large a global reach as SBC has.' ”

Hasan emphasizes that if Verizon acquired MCI it could reduce operating costs and leverage the operational efficiencies inherent in the pairing. “It would be much more an inward-looking move than an outward-looking move,” he says.

The Qwest/MCI talks were reported in The Wall Street Journal on Thursday, which also mentioned that Verizon was in early-stage discussions with MCI.

Verizon stock was trading up 6 cents at $35.94, and MCI stock was up 75 cents at $20.43 in mid-afternoon trading on Thursday.

— Mark Sullivan, Reporter, Light Reading

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