Wall Street: MCI's Choice Of Verizon Over Qwest A No-Brainer - InformationWeek

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2/14/2005
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Wall Street: MCI's Choice Of Verizon Over Qwest A No-Brainer

MCI sold itself to the stronger of two suitors, some Wall Street investment analysts said Monday.

MCI sold itself to the stronger of two suitors, some Wall Street investment analysts said Monday.

Acquisition bids for MCI from both Verizon Communications and Qwest Communications were reportedly in motion last week. Monday morning, Verizon said it will acquire MCI, Ashburn, Va., for about $6.7 billion in equity and cash, according to New York-based Verizon.

The deal to buy MCI at what amounts to $20.75 a share is a bargain for Verizon, but MCI accepted the terms because it sees Verizon as a stronger company than Qwest, said Jay Arnold, portfolio manager at Abacus Asset Management.

"I think [Verizon] stole the company," said Arnold of the MCI purchase. "It's a great deal for Verizon. The shareholders of MCI didn't get a great deal, but maybe the combined companies will be more powerful and the returns will offset that."

Arnold said that even though Qwest outbid Verizon by about a billion dollars, MCI made the right move. The reasoning behind MCI's decision is that Qwest carries considerable debt and is somewhat of "a junk-rated Baby Bell," said Arnold.

"MCI felt a Qwest deal would be largely a stock deal and if Qwest shareholders didn't like the deal, they would sell shares, weakening the overall value," he said.

Allan Tumolillo, COO of Probe Financial Associates, said a decision to sell to Qwest would have been a mistake.

"MCI merging with Qwest would have been the end of the whole thing," said Tumolillo. "[MCI President and CEO Michael] Capellas is a smart guy. He may not know telecom all that well, but you look at Qwest and its $17 billion in debt, and you see they are struggling. MCI doesn't need to go into a mess like that. The only purpose for MCI to talk to Qwest was to provoke Verizon and Bell South to take a look at them more seriously."

Without MCI, the future of Qwest is a major question mark, said Tumolillo. "I think Qwest is headed into oblivion," he said.

The Verizon/MCI deal comes on the heels of SBC Communications buying AT&T in a deal announced Jan. 31.

"We view the [MCI] transaction to be marginally positive for the telecom industry in general," said Buckingham Research Group analysts Qaisar Hasan and May Tang in a report. "Alongside the SBC-AT&T transaction, Verizon's acquisition of MCI could bring much-needed pricing stability into the long-distance market, helping all participants in the space."

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