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
"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."
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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