February 14, 2005, New York Times

Verizon Agrees to Acquire MCI for $6.6 Billion, Beating Qwest

By MATT RICHTEL and ANDREW ROSS SORKIN

Verizon, the nation's largest regional phone company, reached a deal last night to acquire MCI for about $6.6 billion is cash and stock, the latest merger in the rapidly consolidating telecommunications industry.

The deal, which was approved by the boards of both companies late last night, is expected to be announced today, the executives close to the negotiations said.

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

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 had 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, now are coming together again to 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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