MCI accepts Verizon bid of $7.64 billion

With two suitors at hand, MCI rejects higher bid from Qwest

MCI has accepted a revised $7.64 billion acquisition bid from Verizon Communications, rejecting a higher offer from Qwest Communications, MCI announced Tuesday.

The Verizon bid increases the cash payout to MCI shareholders and protects them against the possibility of a drop in the value of Verizon shares they will receive, MCI said in a statement explaining its decision.

In a statement announcing the decision, MCI said that its board considered the following matters as part of the discussion about which offer to take: changing competition in the telecommunications industry; increased need for scale and comprehensive wireless capabilities; access economics; how well the companies will mesh; strength of the capital structure; ongoing ability to sustain network service quality and invest in new areas; how best to ensure customer confidence among large business and government customers.

"We believe Verizon's substantial increase in its offer, the strength of its competitive position and the financial certainty at close make this offer compelling to our shareholders, customers and employees," MCI Chairman Nicholas Katzenbach said in the statement.

Under revised terms of the Verizon deal, each MCI share will receive cash and stock worth at least $23.50, which is an increase in cash of $2.75 per share, or about $900 million in the aggregate, MCI said. That brings the per-share cash payment to $8.75. Verizon may pay more cash instead of issuing additional shares beyond an agreed-upon exchange ratio. The original agreement on Feb. 14 called for MCI shareholders to receive $6 cash along with Verizon shares.

Qwest's most recent proposal was for $10.50 in cash per share along with shares in Qwest. It's total value is $8.45 billion, according to MCI's valuation.

Verizon set off the bidding war by making its Feb. 14 offer, three days after Qwest got things rolling. Both had been in talks with MCI. The bids for MCI came to light a couple of weeks after SBC Communications Inc. announced it would acquire AT&T Corp in a $16 billion deal.

After the initial volley of bids, revisions came in, and deadlines were set to allow MCI to consider the rival bids and negotiate before the board made its final decision.

Verizon, Qwest and SBC are three of the four remaining incumbent local telecom carriers that divided up U.S. local telephone service after the government breakup of the old AT&T in 1984. MCI and AT&T, traditionally long-distance companies, have in recent years focused on building Internet Protocol-based networks and providing telecom and Internet services to large business customers. The incumbent carriers, often called regional Bells, would gain large international and business customer bases through acquisition of AT&T or MCI.

MCI Inc., formerly known WorldCom Inc., has faced financial struggles since June 2002, when an internal audit uncovered $3.8 billion in accounting errors. In July 2002, WorldCom declared bankruptcy, and the accounting misstatements eventually reached $11 billion. In March 2004, a month before the newly renamed MCI emerged from bankruptcy, the company issued a report reducing pretax income for 2000 and 2001 by $74.4 billion.

WorldCom merged with the original MCI Communications Corp. in September 1998 in a $37 billion deal. At the time, it was the largest corporate merger in U.S. history.

Before the company declared bankruptcy, WorldCom Chief Executive Officer Bernard Ebbers resigned in April 2002, amid questions about more than $360 million in personal loans he received from the company. In March 2004, Ebbers was charged in federal court in New York with conspiracy and securities fraud. Scott D. Sullivan, WorldCom's former chief financial officer, pleaded guilty and agreed to cooperate with prosecutors. Ebbers was recently convicted on those charges.

After emerging from bankruptcy, MCI reported revenue of $5 billion in the fourth quarter of 2004, down 10 percent compared to the year-earlier period. The company's operating profit for the quarter was $434 million, compared to an operating loss of $332 million a year earlier.

Verizon was formed through a $53 billion merger between Bell Atlantic and GTE, announced in 1998. Verizon is the incumbent local telecom carrier in New England, New York and the Mid-Atlantic states.

The company, which started as a local phone service carrier, has focused in recent months on enterprise telecom services and on delivering fiber-to-the-premises service to some customers. Verizon’s fiber deployment will allow it to offer television services that compete with cable TV.