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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 market. Table 2 Ownership Ratios Pre-Merger 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 Post-Merger No. of Shares (million) 2780 132.1 2912 0.955 0.045 1 Before merger announcement: February 11, 2005 2 Source: Value Line 132.1 (Verizon Shares) 3 325 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 reasons. 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) Questions: 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 shareholders? 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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