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Archive for Tuesday, February 15, 2005

Verizon, MCI latest to merge

Regulatory changes spur $6.7 billion acquisition

February 15, 2005

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— Verizon Communications Inc.'s $6.7 billion takeover of long-distance provider MCI Inc. is the latest example of how regulatory changes in Washington are continuing to transform the telephone industry.

A court ruling nearly a year ago and subsequent decisions by the Federal Communications Commission were key catalysts for Monday's deal as well as last month's $16 billion takeover of AT&T Corp. by SBC Communications Inc. Those findings effectively forced long-distance providers on the auction block by boosting their operating costs, compounding a multiyear slide in customers and revenues.

While consumer advocates expressed worry, it's not clear the loss of AT&T and MCI as rivals will free their acquirers to boost prices for long-distance phone calls. That's because many consumers and businesses already are taking advantage of money-saving alternatives -- especially cell phones and Internet-based phone services from cable TV companies and others.

"If you're willing to change the way you purchase services, there's a lot of competition out there" beyond the local Bells, said David Willis, an industry analyst for the Meta Group Inc. in Stamford, Conn., who noted that AT&T and MCI already had stopped competing for new residential customers.

The recent spate of telecom mergers, including December's deal by Sprint Corp. to acquire Nextel Communications Inc. for $35 billion, will reduce the industry to four dominant telephone companies: Verizon, SBC, BellSouth Corp. and Sprint Nextel. It also leaves Qwest Communications International Inc., a Denver-based Baby Bell whose higher stock-based bid was rejected by MCI, isolated in a highly competitive market.

Verizon, the country's largest regional phone company, declined to say what will become of the MCI brand. It is a storied name due in part to its role as the first major rival to AT&T's national long-distance monopoly, and then as a legal opponent in the case which led U.S. Judge Harold Greene to order the breakup of the Bell System in 1984.

MCI was acquired in 1998 by Bernard Ebbers' WorldCom Inc., which after a financial scandal and a trip through bankruptcy court reorganization, re-emerged with the MCI name in 2003.

Monday's transactions marks the second major sale of a company by Michael D. Capellas, MCI's president and CEO. He was the head of Compaq Computer Corp. when it was taken over by Hewlett-Packard Co. in 2002, a troubled merger that just last week helped cost H-P Chief Executive Carly Fiorina her job.

For SBC and Verizon, the consumer business is a minor attraction in their purchases. Instead, they are counting on the corporate customers and national network operations which New York-based AT&T and Ashburn, Va.-based MCI bring.

The merger would jump-start Verizon's efforts to become a national service provider for large companies thanks to MCI's base of 1 million business customers and an extensive fiber-optic network and local infrastructure outside of Verizon's largely Northeastern power base.

Such attributes were an even bigger lure for San Antonio, Texas-based SBC in acquiring AT&T, which has three times as many business customers and provides substantial network assets and operations beyond SBC's strongholds in the Southwest, the Midwest and California.

Still, AT&T and MCI also bring a big base of residential customers to whom SBC and Verizon would like to market cable TV services they plan to begin providing over their phone lines starting later this year. Both SBC and Verizon are investing billions to upgrade their networks to deliver video and interactive services.

The Verizon-MCI deal, expected to take one year to gain government approvals, will result in about 7,000 job cuts from the two companies' combined work force of about 250,000 employees, executives said in a conference call after the announcement.

Capellas and the MCI board accepted Verizon's bid even though it was about a half billion dollars below what Qwest offered. Verizon, also a top cellular player, likely won MCI's favor because it is larger and in better financial shape than Qwest.

MCI investors were said to have reacted poorly to the prospect of being paid with shares of stock in Qwest, the local phone carrier for much of the sparsely populated Rocky Mountains and Pacific Northwest that has been marred by its own accounting scandals.

The deal values MCI's stock at $20.75 per share -- equal to Friday's closing price on the Nasdaq Stock Market. But after rising 12 percent in two weeks amid speculation fueled by the SBC-AT&T deal, MCI's shares fell 82 cents, or 4 percent, to $19.93 in Monday's trading.

Verizon shares fell 12 cents, or 0.3 percent, to $36.19 on the New York Stock Exchange. Qwest shares fell 17 cents, or 4.1 percent, to $3.98.

Under the agreement, Verizon will pay stock currently worth $4.779 billion and $488 million in cash for MCI's shares. In addition, MCI shareholders will be paid dividends worth $1.463 billion.

Verizon is also assuming MCI's debt, expected to total $4 billion at closing. The companies estimate that merger expenses will total up to $3.5 billion over three years once the deal closes, but that cost-cutting from redundant operations will yield $1 billion per year in savings starting in the third year.

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