Question

VERIZON, QWEST AND MCI

Discuss the acquisition of MCI by Verizon by highlighting the following:

1. Who were the winners and losers in the Verizon/MCI merger deal?
2. What were the takeover tactics available to Verizon and Qwest?
3. How did MCI attempt to defend themselves?

Answer 1

Who were the winners and losers in the Verizon/ MCI merger deal?

The winners clearly included the MCI shareholders who earned 41% premium over the pre-bid value of their share price. This is especially true for those who wish to remain long terms investors; however, those with a short term focus such as hedge funds, believe that they were short changed by the MCI board which did not chose the highest bid. If the coupling of Verizon rather than Qwest with MCI does not indeed result in a more viable form, longer term, MCI's customers, employees, suppliers, and lenders could also be included among the winners.

Qwest and its stakeholders are probably the losers in this instance as the firm;s remaining options are limited and largely involve the disposition of redundant assets to pay off its then current $17 billion debt load.

What were the takeover tactics available to Verizon and Qwest?

Verizon pursued a friendly approach to MCI believing that it could convince MCIs management and board that it represented the stronger strategic partner. Consequenty, its stock was likely to appreciate more than Qwest's. MCIs board seems to have accepted this premise from the outset until investor pressure forced them to consider seriously the higher Qwest bids. Verizon used public pressure, by noting that if MCI did not accept their bid that is was due to MCIs management and board being excessively influenced by the focus of hedge funds on short term profitability. Verizon also made its final bid contingent on MCI making public its customers discomfort with MCI being acquired by Qwest. Verizon also bought out the largest hostile MCI shareholder, Carlos Slim Helu. Moreover, Verizon, made the special dividend to MCI shareholders payable upon approval rather than at closing as an additional inducement to gain MCI shareholder approval of the proposed transaction. Also, Verizon included a disincentive not to close in its merger agreement with MCI in the form of a $200 million break-up fee. Finally, once Verizon had a signed merger agreement with MCI, it initiated its S-4 filing in early April even before the bidding was over to start the clock on the regulatory approval of the MCI proxy enclosed with the filing and on setting a date for a special MCI shareholders meeting.

Because Qwest did not have an attractive acquisition currency (i.e. stock), it relied heavily on maintaining a sizeable premium over the Verizon bid to attempt to win MCI board approval of its proposals. Qwest used publicity and indirectly or directly aligned themselves with hedge funds, to presuure the MCI board to accept their bid. They also held out the threat of a tender offer, but the submission of the S-4 by Verizon Limited, the amount of time for implementing a tender offer. Also, Qwest used the threat of a proxy fight to get MCI shareholders to vote against the Verizon agreement. Finally, Qwest threatened to try to block regulatory approval. In the final analysis, Qwest simply did not have the financial resources or the strategic appeal to MCI to win this bidding contest.

How did MCI intends to defend themselves?

MCI employed a poison pill, staggered board and golden parachute defences. The poisoned pills discouraged suitors from buying a large piece of the MCI, which would have triggered the poison pill and increased the cost of the takeover. The staggered board made a proxy fight to remove the board members hostile to a Qwest bid or to withdraw the poison pill in a single year impossible. Golden parachutes also added to the cost of the transaction.