Verizon sweeps up MCI in $6.7 billion merger

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Verizon has agreed to acquire MCI in a deal valued at $6.7 billion, the companies announced Monday, ending weeks of speculation about a likely deal.

Verizon said the acquisition would accelerate its plans to become a significant player in the enterprise services market, giving it a broader reach globally, a suite of advanced IP-based services and a large base of business and government customers.

“This is a transaction that is focused on the strengths of both companies' core business… and will drive signficant operational efficiencies and at the same time create opportunities for growth,” says Ivan Seidenberg, Verizon's chairman and CEO.

Michael Capellas, president and CEO at MCI echoed Seidenberg’s views and went on to say, “From a customer perspective, the overwhelming theme is that customers want to have simplified delivery, one-stop shopping and a single point of contact."

Getting regulatory approval for the deal is likely to take as much as a year, the companies said. Verizon must also win the approval of MCI's shareholders. The boards of directors at both companies have approved the agreement, they said in a statement. The Department of Justice, the FCC and several state public utilities commissions must also approve the deal.

Getting regulatory approval for the deal is likely to take as much as a year, the companies said. Verizon must also win the approval of MCI's shareholders. The board of directors at both companies have approved the agreement, they said in a statement.

Verizon will pay $4.8 billion in shares and $488 million in cash to buy MCI. MCI, meanwhile, will pay its shareowners quarterly and special dividends of $4.50 per share, worth $1.46 billion, bringing the total value of the deal to $6.7 billion, the companies said.

Ivan Seindenberg, Verizon's chairman and CEO, called the deal "a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies."

The companies will figure out their branding strategy, organizational structure and other details closer to the completion of the deal, they said. Verizon will take on MCI's net debt when the deal closes, projected to be about $4 billion.

The companies plan to lay off about 7,000 employees after the deal closes, including IT workers, engineers, sales staff, human resources, legal and corporate support staff. Verizon anticipates savings of $500 million in the first year of the deal, and $1 billion a year in the third year and later. Savings will come from job cuts, an IT overhaul at MCI and real estate consolidation, said Doreen Toben, chief financial officer at Verizon.

Verizon also expects to save $100 million annually by bringing its long distance traffic on to MCI’s network alone. Today Verizon works with a number of providers to support its long distance traffic.

Officials from both companies said the marriage makes sense by combining Verizon, traditionally a regional local phone service carrier, with MCI, which has focused recently on enterprise and government customers, as well as global IP-based services. With an MCI IP backbone that reaches across the U.S. and into more than 140 other countries, Verizon will save about $100 million a year on long-distance carrier charges, Toben said.

The deal comes two weeks after SBC said it plans to acquire AT&T in a deal worth $16 billion, and is likely to spark a guessing game among industry insiders over possible additional merger deals.

Qwest, which had been trying to broker its own deal with MCI , now finds itself on its own, and analysts last week speculated over plans that BellSouth and Sprint might have plans for a deal with a competitor or with each other.

Although the SBC/AT&T deal sparked speculation of new mergers in the telecom industry, Verizon and MCI have been discussing a deal since about the third quarter of 2004, Seidenberg said.

Neither MCI nor Verizon is new to the world of mergers.

Verizon itself was formed through a $53 billion merger, completed in June 2000, between Bell Atlantic and GTE, both of which were created after the government-ordered breakup of the old AT&T in 1984. WorldCom merged with the original MCI in September 1998 in a $37 billion deal that, at the time, was the largest corporate merger in U.S. history. The deal created MCI WorldCom.

Verizon went on to riches and in 2004 had $67.8 billion in annual revenue, making it the world’s largest telecom company. Verizon, which started as a local phone service carrier, has focused in recent months on enterprise telecom services and on delivering fiber-to-the-premises service to some customers. Verizon's fiber deployment will allow it to offer television services that compete with cable TV.

MCI WorldCom's fate would be very different. A massive accounting scandal enveloped the company after an internal audit in June 2002 uncovered $3.8 billion in accounting errors. In July 2002, WorldCom declared bankruptcy, and the accounting misstatements eventually reached a total of $11 billion. In March 2004, a month before the newly renamed MCI emerged from bankruptcy, the company issued a report reducing pretax income for 2000 and 2001 by $74.4 billion.

Before the company declared bankruptcy, WorldCom CEO Bernard Ebbers resigned in April 2002, amid questions about more than $360 million in personal loans he received from the company. In March 2004, Ebbers was charged in federal court in New York with conspiracy and securities fraud. Scott D. Sullivan, WorldCom's former chief financial officer, pleaded guilty and agreed to cooperate with prosecutors.

Ebbers' trial began in the U.S. District Court for the Southern District of New York in January 2005.

After emerging from bankruptcy, MCI reported a $3.4 billion loss in the third quarter of 2004. On Monday, MCI reported fourth-quarter revenue of $5 billion, down 10% from the fourth quarter of 2003.

MCI's operating income before depreciation and amortization was $775 million, but the operating income included incidental items of $270 million.

Trading in shares in both companies has been volatile during recent weeks as investors adjusted their portfolios to take into account the expected acquisition. The value of MCI shares declined in early Monday morning trading, by $1.33, to $19.42, while Verizon shares moved up by 69 cents to $37.00.

Network World Senior Editor Denise Pappalardo contributed to this report.

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