February 14, 2005 10:18 AM PST

Verizon, MCI to link up in $6.7 billion deal

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explode over the next couple of years. Most of the IP decisions will be made over the next few years. When you add wireless, you create the ultimate enterprise bundle."

Like the SBC-AT&T merger announced two weeks ago, the Verizon-MCI deal is about cutting costs. Verizon expects to save $1 billion in the third year after this acquisition is complete, Doreen Tobin, the company's chief financial officer, said during the conference call.

Tobin said Verizon will save money by eliminating most of the cost associated with getting a long-distance provider to carry Verizon's local

This is a market that will explode over the next couple of years.
--Michael Capellas, CEO, MCI
traffic outside of Verizon's own region. It will also save at least $150 million annually on its ongoing plan to build its own long-distance network. The company will also save by consolidating its operational resources, reducing its internal information technology systems and data centers and reducing head count. Tobin said she expects the companies to cut about 7,000 employees in the restructuring.

"We see some big opportunities in eliminating duplicate network resources," she said. "We (at Verizon) have a strong track record of doing this in our own network."

The competition
Qwest had also put a bid in for MCI--which was known as WorldCom until the company changed its name to distance itself from a huge corporate fraud scandal.

After Verizon's intentions became known last week, Qwest supposedly edged up its offer from $6.3 billion to $7.3 billion, according to published reports. Qwest was viewed as a less appealing acquirer due to its poor growth potential and large debt load.

"It was not only a matter of economics but also a matter of which deal offered the best strategic value going forward," said Rick Black, senior telecommunications analyst with Blaylock & Partners. "Even though Qwest offered more, you have to ask yourself if Verizon will be more competitive in the future."

Some analysts said Qwest may put itself on the auction block. But it could be a hard sell, since Qwest's core value proposition is its local telephone business, which has been declining rapidly and is only built out in 14 sparsely populated Western states. What's more, the carrier is the only Baby Bell that doesn't have its own wireless network. In July 2004, Verizon Wireless announced its intent to buy Qwest's wireless assets for $418 million.

"Qwest saw a need to change its business by adding MCI," said Brad Wilson, an analyst with Legg Mason. "I think they'll continue to look for someone to buy them. But it won't be easy at these prices."

The only other Baby Bell left without a dance partner is BellSouth. After the SBC-AT&T acquisition was announced, analysts speculated that BellSouth might make a play for MCI too. The phone company owns 40 percent of Cingular, while SBC owns the other 60 percent. Analysts have speculated that an SBC-AT&T combined company could put pressure on this relationship, since SBC will now be competing head-to-head with BellSouth in its territory.

BellSouth had tried to acquire AT&T a little more than a year ago, but talks between the two companies broke down when the firms couldn't agree on a price, telecommunications industry sources said. BellSouth may have wanted MCI to compete more directly with SBC. Jeff Battcher, a spokesman for BellSouth, declined to comment on the speculation.

Analysts said now that the two biggest long-distance players are out of the market, BellSouth will likely continue with its existing strategy. Sprint, the No. 3 long-distance player, is probably too expensive for

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Verizon/MCI merger
What MCI did to stockholders, employees and the public was criminal. I would never do business with them again and I certainly won't ever do business with verizon now either. I'm sure my daughter who was never paid her last 40 hour pay check from MCI won't either. The thieves walked away with millions while everyone else suffered and our courts let it happen.

I am so angry with them and now verizon. MCI deserves to die a slow and long death!
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