Verizon Closes Deal to Buy MCI

[David Farber <dave () farber net>]

February 14, 2005

Verizon Closes Deal to Buy MCI for About $7 Billion
 By MATT RICHTEL 
and ANDREW ROSS SORKIN
 

 erizon, the nation's largest regional phone company, announced this morning
that it had agreed to acquire  MCI for about $6.6 billion in cash and stock,
the latest merger in the rapidly consolidating telecommunications industry.

Verizon's acquisition ends end the independence of MCI, the nation's
second-largest long-distance company, with 14 million residential customers
and about a million corporate customers.

 "This is the right deal at the right time," Verizon's chief executive, Ivan
Seidenberg, said in a statement on the company's Web site.

 Last year MCI emerged from bankruptcy protection and changed its name from
WorldCom after nearly collapsing when an $11 billion accounting fraud was
unearthed. MCI is a shadow of its former self, but its high-margin corporate
customers and worldwide telephone and data network make it quite valuable.

 MCI became the subject of a torrent of takeover interest among its rivals
in recent weeks after SBC, the second-largest regional phone company in the
nation, agreed to acquire AT&T for $15 billion.

 That left MCI one of the last remaining major telecommunications companies
up for grabs. Indeed, Verizon defeated its much smaller rival,  Qwest
Communications, in an 11th-hour takeover skirmish over the weekend for
control of MCI.

 Qwest submitted several ever-increasing bids for MCI over the past week,
the executives said. Late Friday night, Qwest submitted a final bid worth
$7.3 billion, the executives said. Still, MCI's board chose to accept
Verizon's lower bid because it had concerns about Qwest's ability to finance
the transaction and about the long-term value of Qwest's stock, the
executives said.

 The deal reflects Verizon's interest in growing its present business of
selling telephone and data services to corporate customers, an operation
said by industry analysts to be worth about $250 billion a year. Still, the
lure of MCI was considered more complicated than the acquisition of AT&T, in
part because of the stigma of its recent bankruptcy.

 Spokesmen for Verizon, MCI and Qwest all declined to comment. Mergers in
the telecommunications industry have revived in the last few months after
several years of declining sales, bankruptcies and accounting scandals.

 In December,  Sprint and Nextel agreed to merge to form the third-largest
wireless company. Less than a month later,  Alltel, a regional cellular
provider, said it would buy  Western Wireless.

 These deals, plus the one by SBC and AT&T, analysts said, were partly a
response to the re-election of President Bush, whose administration has
imposed relatively few restrictions on the merging of companies. While
Verizon's agreement to acquire MCI will face regulatory scrutiny, legal
experts have suggested the deal will probably be approved.

 The lawyers said the antitrust analysis might be slightly more complicated
because the deal is likely to be examined not just on its own but within the
context of the entire industry, which is quickly being redrawn.

 The acquisition of MCI reflects a marked and swift change sweeping the
telecommunications industry, brought largely by shifts in technology. A
combination of forces, like heavy reliance on wireless communications and
the Internet, have cut deeply into the traditional wired telephone business,
forcing companies like Verizon to find new sources of revenue.

Even as the industry has evolved, it has in some ways gone backwards. A
series of mergers in recent months has consolidated market power in the
hands of a few companies. These companies, once the progeny of the breakup
of AT&T, are now coming together again for large regional telecommunications
juggernauts, challenged only by an emerging cable industry.

 For Verizon, MCI could be considered the consolation prize for not buying
AT&T. But for MCI and Michael D. Capellas, who was brought in as chief
executive to take the company out of bankruptcy and turn it around, the deal
is a boon.

 Industry analysts give Mr. Capellas high marks for cutting costs. He also
began an aggressive sales effort to keep the company's biggest customers
while it was operating under bankruptcy protection, which it exited in April
last year with less debt relative to AT&T and $5.6 billion in cash on its
balance sheet.

 But Mr. Capellas will not have a role at Verizon once the deal is competed,
the executives said. Mr. Capellas was formerly the chief executive of Compaq
Computers before selling it in 2002 to Hewlett-Packard.

Industry experts say MCI operationally is less impressive than AT&T. The
company's share of the corporate phone and data market is roughly half of
AT&T's, and it is considered by industry analysts to be less efficient than
AT&T.

 Michael Rollins, an analyst at Smith Barney, said each MCI employee
generated $425,000 in annual revenue, nearly 30 percent less than an AT&T
worker. Its profit margins after deducting access charges paid to the Bells
and others are 8 percentage points lower than AT&T's. The company also
invests less on its network and operations.

 UBS data show MCI having pretax profits in its two other major business
sectors: one with customers ranging from midsize businesses down to
consumers, which had $9.1 billion in revenue in 2004; and another, with
international corporate customers and wholesale network sales, or sales to
other carriers, which hit $6.6 billion in 2004.

MCI plans to report its fourth-quarter and full-year results in the next two
weeks, but has yet to set a firm date. MCI shares were at $20.80 during
after-hours trading on Friday, up 34 cents from the close on Thursday;
Verizon shares closed at $36.31, a gain of 27 cents.


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