Is there a chance Qwest might yet wrest MCI from Verizon? Absolutely, say experts watching the tug of war, but how likely that chance might be remains a matter of conjecture.
Is there a chance Qwest might yet wrest MCI from Verizon ?
Absolutely, say experts watching the tug of war, but how likely that chance might be remains a matter of conjecture.
“Qwest has made it very interesting,” says Mark Winther, a group vice president at IDC. “The offer Qwest has put on the table, aside from future potential, is better.”
But MCI has signed Verizon’s offer, and absent a change of heart brought on by an enhanced Qwest offer and/or pressure from MCI stockholders, Verizon stands to carry the deal to its regulatory approval phase.
There is an out for MCI if it so chooses. But MCI, or Qwest, would have to pay a $200 million break-up fee to Verizon if that’s the road it takes.
“You often see these break-up fees in merger and acquisition deals, but $200 million is a lot of money. It would be unusual to see that type of payout,” says Tony Aquilina, principal at investment banking group Stonebridge Technology Associates.
Qwest continues to insist that its spurned bid of $8 billion remains superior and that it has also sweetened the offer in a variety of ways since MCI and Verizon announced their deal. Qwest says it can provide stronger cost savings of $14.8 billion through a pairing with MCI than the $7 billion Verizon claims. Qwest also has tried to improve its offer with a “collar” that guarantees MCI will receive at least $15.50 for each Qwest share, irrespective of what happens to its stock price in the interim.
However, when Qwest’s debt of $16.7 billion and the lack of evidence it can increase revenue at a substantial rate are factored in, Qwest’s offer is less valuable in the long term, according to a report issued last week by Michael Bowen, a financial analyst at investment banking firm Friedman, Billings, Ramsey & Co.
The renewed push from Qwest comes three weeks after Verizon announced its plans to buy MCI for $6.8 billion and about six weeks after SBC announced its plans to acquire AT&T for $16 billion.
Customers are watching the events unfold with great interest and some trepidation.
“I was pretty bummed out when I heard about Qwest’s bid,” says Bill Strickland, national technology manager for IS LAN/WAN services at Toyota Motor Sales USA. “Qwest doesn’t bring much to the table. It’s really not in a better position than MCI, even with its old U.S. West assets. [It’s] financially challenged, and they have no wireless strategy to speak of.”
Toyota Motor Sales outsources its 1,100-site VPN service to MCI. The network connects Toyota and Lexus dealers across the country to Toyota’s U.S. headquarters in Torrance, Calif.
“Verizon is a much better choice,” Strickland says. It is more financially stable, and its products are more complementary to MCI’s, he says.
However prevalent, customer sentiments such as this will not absolve MCI officials of their fiduciary responsibility to fully consider the Qwest plea, experts agree.
The very public negotiations between Qwest and MCI hit a fevered pitch last week with an op-ed column from Qwest’s CEO Richard Notebaert in The Wall Street Journal and a series of back-and-forth letters.
Qwest complained in one missive that MCI had not been forthcoming with financial information in earlier negotiations. MCI countered Qwest’s claims in a letter to Notebaert stating that it had had “25 in-person meetings and more than 50 joint conference calls” with Qwest.
The public bickering continued through late last week even after MCI said it would review Qwest’s bid up until March 17. Notebaert issued a statement saying, “We are also concerned that the process over the next two weeks will simply be process for process sake, as opposed to a meaningful evaluation of our offer.”
MCI’s counter: “We believe that constructive dialogue – rather than rhetoric – is in everyone’s best interest. MCI remains committed to a full and meaningful exchange of information.”
IDC’s Winther says he expects Verizon to sweeten its offer if it appears MCI might start leaning in Qwest’s favor.
Lehman Brothers says Verizon should avoid a bidding war with Qwest and walk away. The equity research firm says MCI’s board could find it difficult not to accept Qwest’s higher bid and stronger cost-reduction synergies.
There are two main areas where Qwest is finding the cost savings. The company is proposing migrating MCI’s traffic from a variety of networks onto its vast OC-192 fiber optic network. The carrier also is proposing up to 7,000 more job cuts than Verizon.
