Verizon-MCI by yan198555


									                                       Verizon-MCI Merger

        Following on other consolidations in the telecommunications industry (SBC’s

acquisition of AT&T and Sprint’s acquisition of Nextel), Verizon Communications

announced on February 14, 2005 a deal to acquire MCI for $6.7 billion.

                                             Table 1
                                          Merger Terms
             Merger Terms             Shares    Verizon        Value per      Value
                                              Stock Price       share       (billions)
          Verizon Shares               132.1     $36.31         $14.75       $4.797
          Cash                                                   $1.50       $0.488
          Special Dividends                                      $4.50       $1.463
          Total Value of Merger                                 $20.75       $6.748

          MCI stock value (on                                   $20.75
          February 11, 2005)
          Premium                                                 0%

        The terms of the deal included shares in the merged firm, cash, and special dividends,

which valued each share of MCI at a 0% premium of $20.75. This merger combines the

nation’s largest regional phone company (Verizon), with the nation’s 2nd largest long-

distance company (MCI), creating a company that could potentially stand as No. 2 in the


                                            Table 2
                                         Ownership Ratios
                                         Dollar Amounts                      Percentage
                                       Verizon      MCI         Total      Verizon MCI
    Share Price1                        $36.31     $20.75
    Shares Outstanding (million)        27802       3253
    Total Market Value (billion)       $100.942    $6.744      $107.686    0.937     0.063
    Exchange Terms                               0.406 for 1
    No. of Shares (million)              2780       132.1       2912       0.955     0.045
  Before merger announcement: February 11, 2005
  Source: Value Line
        132.1 (Verizon Shares)
  325 
        0.406 (Exchangerate)
       MCI had made a recovery from a highly publicized $11 billion accounting scandal in

2002, after which they changed their name from WorldCom, followed by Chapter 11

bankruptcy. Nonetheless, a merger was considered essential for the firm to survive among

larger competitors. Although it is no longer a leading company, MCI is still valuable to

acquirers because it holds a large corporate customer base and has a worldwide telephone

and data network. In 2000, MCI’s bid for Sprint was rejected by federal antitrust officials on

the fear that the merger would create a telecom giant, whose reach would extend worldwide,

and have too much control on the Internet’s backbone networks (wireless, data

communications, and long distance).

       Before the Verizon merger announcement, Qwest Communications had been in talks

to buy MCI, making a final bid of $7.3 billion ($0.6 billion above Verizon’s purchase price).

However, that bid was rejected by MCI’s board in favor of Verizon’s lower bid for several


       Qwest stands as the smallest and weakest of the Bell operating companies, with

several problems of its own. Not only does it suffer from its own accounting scandals

(paying a $250 million settlement with the SEC), but it also has $17 billion in debt and a

declining landline business of 4% a year. The company has experienced net losses since

2000, amounting to over $45 billion. It is also a weaker partner than Verizon from a strategic

perspective—it does not have its own essential wireless network and serves a rural region

with only a few business centers in 14 states. For MCI, Qwest’s financial difficulties and

their questionable ability to maintain long-term value were significant concerns against

choosing the company as its best suitor.
        The announcement of a Verizon-MCI merger shortly after SBC’s agreement to

acquire AT&T has analysts questioning who will be the winners and losers from the rapidly

consolidating telecommunications industry. Some of the concerns deal with consequences

for customers since the elimination of two long-distance providers (MCI and AT&T) reduces

choices and competition. The only opponent left to counter the telecom giants is the cable

industry, which is slowly moving into phone services. Antitrust regulators have yet to

approve the two telecom deals.

        Evident winners of these big mergers have been the debtholders of the acquired firms.

The Verizon deal, which includes the assumption of about $4 billion of MCI’s debt, is clearly

beneficial to MCI bondholders. Previously deemed as riskier junk bonds, the “implicit

support” of creditworthy Verizon raises MCI’s ratings to investment-grade securities.

Similar gains have been noted for AT&T and Nextel on announcement of mergers with SBC

and Sprint respectively.

(Source: Wall Street Journal)


a. In Table 1, the data show that the total value per share received by MCI in the merger

    terms approximated its closing market value on February 11, 2005, the Friday before the

    merger was announced on the following Monday. Why was no premium paid to MCI


b. From the data in the problem, why did the ownership share of MCI stockholders decrease

    from their premerger relationship?

c. Do you think this merger creates antitrust problems?

d. From the standpoint of the MCI bondholders, what is an important advantage of Verizon

    as the acquirer versus Qwest?

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