The decision by MCI's board to accept the latest acquisition offer from Verizon doesn't mean the bidding battle between Verizon and Qwest Communications is over, analysts said Tuesday. While Verizon is generally seen by analysts as the more compatible suitor, Qwest shouldn't yet be counted out, they said.
"I don't think the fat lady has sung in this case," said Jay Pultz, research vice president at Gartner, in Stamford, Connecticut. "I think Verizon is closer now to being a winner, but the battle for control over MCI is not over as yet. ... It is not clear that they have completely won."
MCI announced on Tuesday that it has accepted an offer worth $7.6 billion from Verizon, rejecting a bid worth more than $8 billion from Qwest. Discussions between MCI and Verizon, and MCI and Qwest, have been going on for some time, constituting "one of the most ill-tempered episodes in recent U.S. telecom history," in the words of Ovum research director Jan Dawson, who is based in Boston.
Some observers expect Qwest to make another offer and others think that Qwest might even take its offer directly to shareholders, which could lead to a proxy fight. Qwest for its part had only this to say on Tuesday: "We respect the right of Verizon to change the composition and value of their bid, but we still believe our proposal creates superior value for shareowners. We are going to assess the situation and determine what is in the best interests of shareowners, customers and employees."
That Qwest seems to place shareholders first in the equation has not gone unnoticed.
"Qwest seems to be wooing MCI investors more than MCI executives," said Brian Washburn, a Newton, Massachusetts-based senior analyst at Current Analysis Inc. MCI employees may be worried that Qwest, which has a lot of debt, would spin off or sell MCI assets, Washburn and other analysts said.
Many MCI shareholders are hedge funds that bought MCI shares for a quick return, rather than necessarily for long-term investment, so they aren't as interested in long-range prospects, said Frank Dzubeck, president of consulting company Communications Network Architects Inc., in Washington, D.C.
Then there are the motivations of Qwest, which might want to keep bidding going as a way to pressure rival Verizon. "I'm sure they'd love to get MCI, but they may have had a pretty good idea from the outset that Verizon was going to get MCI, so why not make it more painful," Washburn said.
So far, though, Verizon has refused to get into much of a bidding battle. Although the offer accepted by MCI was an increase, it still is lower than Qwest's most recent offer, analysts noted. "I don't think it's a matter of price -- it's a strange situation," said independent telecoms analysts Jeff Kagan. "MCI would love to get a higher price, but Verizon hasn't bid it up. The bottom line is that MCI would rather go with Verizon."
While Kagan thinks that MCI could fit well with either suitor, the MCI board listed a number of factors in its decision to take the Verizon bid. It cited 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; and how best to ensure customer confidence among large business and government customers.