April 5, 2005 4:00 AM PDT
Perspective: Writing the right ending to the MCI saga
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But there is one last big step to completing the process--they need to pick the merger partner that is best for their shareholders.
This choice could make a huge difference in whether they complete the task or fall way short of the goal line. Local phone companies Qwest Communications and Verizon Communications have each made bids to buy MCI and at the same time tried to taint the other's bid by claiming it involves substantial uncertainty and regulatory risk.Ultimately, however, the board's choice should come down to money.
Both companies have offered a combination of cash and stock. The cash part is relatively easy to evaluate. The stock part is a bit more complicated, but only because of the delay in closing the deal.
The easiest way to think about this is to imagine that a deal could close tomorrow. At that point, the cash and shares would flow to the current MCI owners. They could then keep or sell the new shares. If they thought that the other company had better long-term prospects, then they could sell the shares they got and buy stock in the other company.
The difference in deals that might close tomorrow would be small. In that case, the decision would be easy--accept the more highly valued deal.
The real difference in these two deals arises from two factors: the stock price risk over the next year and the regulatory review process. Both companies have argued that the regulatory-risk factors favor their particular deal. Qwest has pointed to antitrust concerns for the Verizon deal, and Verizon has pointed to state regulators' concerns
Some people point to a difference between "long-term" and "short-term" shareholders, and say that the board has to evaluate the different interests of each group. However, the distinction is a chimera--transaction costs are low enough that long-term holders could adjust their portfolios to take account of the deal. So that leaves the stock price risk over the next year.
The Qwest deal, as of March 31, has about 50 percent cash and 50 percent in Qwest equity. The Verizon deal is structured similarly, with an additional cash dividend.
Many people have made the argument that Qwest's prospects are not as promising as Verizon's and therefore the Verizon offer should be valued more highly. Unless Michael Capellas and the rest of the MCI board know something that the rest of the world does not know (and can't tell from MCI's words and actions), the Verizon bid already reflects this premium. Qwest's current stock price reflects the nature of its territory, its lack of a wireless business and all of the other factors that Verizon is claiming should discount the Qwest bid.
In fact, if the riskiness (or volatility) of Qwest is expected to be higher than Verizon, an equal value bid by Qwest based on today's stock prices would have a higher expected value one year from today, because of the risk premiums that investors have already built into the stock price. Now, you don't have to believe in the "efficient market" theory to accept this logic--you simply have to believe that the MCI board is not any better at determining long-term prospects for Qwest and Verizon than the rest of the market.
Synergies
There is one additional point--synergies. Qwest claims substantial synergies in its bid. Verizon also claims synergies. But it is likely that the acquisition of MCI would have a much smaller impact of the long-term prospects of Verizon, a $100 billion company, than it would on those of Qwest, a much smaller company.
It is hard to understand why MCI is not valuing these offers in a more straightforward manner. In many cases, people believe that management wants to increase its personal stake through additional shares or roles in the newly merged company. This does not appear to be the case with Capellas, who left Compaq and presumably has no desire for a leading role in either Verizon or Qwest.
Another explanation is that accepting a sure thing may not have an upside potential, but it also does not have downside risk. MCI's management may want to be able to claim success with a nearly certain deal, even if it leaves some shareholder money on the table. However, the risk preferences for a successful deal completion should be based on shareholder preferences, not management's reputation.
The bottom line is the bottom line: MCI's board should ignore all of the rhetoric about antitrust, regulation and future prospects. Instead, they should look at the liquid assets--cash and stock--that its shareholders will receive when the deal closes and pick the deal that brings in the higher amount.
I should note that it could also be that Qwest's management is not acting in the best interests of its shareholders, if it is paying too a high price for MCI. The management could see an MCI acquisition as Qwest's best chance for long-term survival in the telecommunications industry, even if that chance might be small. If that is not in the best interests of Qwest shareholders, Qwest should reevaluate its bid. But that is not MCI's concern.
It should not matter to MCI whether Qwest or Verizon overpays for MCI--MCI shareholders will win on that, and the acquiring firm's shareholders will lose. MCI should just be concerned with how much they can get for their shareholders. The competition and bidding between Qwest and Verizon so far has been great for MCI's shareholders.
Ultimately, MCI's board will have to recommend a deal to its shareholders. The answer should be easy. Is $8.9 billion larger than $7.6 billion? Even top-notch CPAs should be able to figure that one out.
Biography
Gregory L. Rosston is deputy director of the Stanford Institute for Economic Policy Research and previously served as deputy chief economist of the Federal Communications Commission. He provided auction advice to Frontline Wireless.
judging a car on its price. There are such blatant errors in
choosing Qwest over Verizon it makes me sick to hear it even
continue. Here is why...
Yes, I agree getting the most money for a company is a good
thing, but only if it can sustain continued growth. All the money
in the world if it ends up killing both companies is business
suicide. The problem is that very little attention is being given to
this by the media. Qwest has one of the worst service records in
the entire industry, whether it be by consumers or corporations.
Now, as normal, there are obvious exceptions to the luck that
some customers may have, but on the whole, Qwest purchasing
MCI would be like Yugo purchasing GM. Just the UUNet/IP arm of
MCI under Qwests control should send worries into anyone's
mind that has backbone service from them. That incredible
reliability and ability to have service would be severely
undermined, as USWorst/Qwest have never been able to manage
their own companies effectively over the long term. Now they
want to add an arm that they probably cannot even comprehend.
Not that Verizon is much better, but they have a genuine desire
to things happen, whereas Qwest will let things fall apart.
I guess what I am getting at is that looking at only the first set of
numbers does not do a company's long term viability in a sale or
purchase any good. One has to look at some of the long-term
effects to the company, its customers and those around it in
order to have a complete perspective. There are lots out there
that absolutely refuse to have Qwest services anywhere in their
chain, whether it be the backbone or the last mile.
All the money in the world is only as great as it can be
sustained. If Qwest were to allow the sale for the IP backbone to
another company, this would make more sense, but Qwest
controlling one of the largest IP networks in the world is just
plain foolish. It may work for the first few months, but once
Qwest starts messing with it, it is all over. When that happens,
customers will dry up faster than they can blink an eye. Then,
Qwest will have an immense network with costs and liabilities
that they do not have customers to pay for. Once that happens,
how can the company sustain itself, not to mention make it grow
and be profitable?
judging a car on its price. There are such blatant errors in
choosing Qwest over Verizon it makes me sick to hear it even
continue. Here is why...
Yes, I agree getting the most money for a company is a good
thing, but only if it can sustain continued growth. All the money
in the world if it ends up killing both companies is business
suicide. The problem is that very little attention is being given to
this by the media. Qwest has one of the worst service records in
the entire industry, whether it be by consumers or corporations.
Now, as normal, there are obvious exceptions to the luck that
some customers may have, but on the whole, Qwest purchasing
MCI would be like Yugo purchasing GM. Just the UUNet/IP arm of
MCI under Qwests control should send worries into anyone's
mind that has backbone service from them. That incredible
reliability and ability to have service would be severely
undermined, as USWorst/Qwest have never been able to manage
their own companies effectively over the long term. Now they
want to add an arm that they probably cannot even comprehend.
Not that Verizon is much better, but they have a genuine desire
to things happen, whereas Qwest will let things fall apart.
I guess what I am getting at is that looking at only the first set of
numbers does not do a company's long term viability in a sale or
purchase any good. One has to look at some of the long-term
effects to the company, its customers and those around it in
order to have a complete perspective. There are lots out there
that absolutely refuse to have Qwest services anywhere in their
chain, whether it be the backbone or the last mile.
All the money in the world is only as great as it can be
sustained. If Qwest were to allow the sale for the IP backbone to
another company, this would make more sense, but Qwest
controlling one of the largest IP networks in the world is just
plain foolish. It may work for the first few months, but once
Qwest starts messing with it, it is all over. When that happens,
customers will dry up faster than they can blink an eye. Then,
Qwest will have an immense network with costs and liabilities
that they do not have customers to pay for. Once that happens,
how can the company sustain itself, not to mention make it grow
and be profitable?
the reason the Dot-Com skyrocket occurred a,d why the buist
followed. When management and shareholders don't give a
damn about the company's future, the company won't have a
future.
Qwest has already demonstrated that core philosophy very well.
That's why it's a virtual bust in the Baby Bell arena.
the reason the Dot-Com skyrocket occurred a,d why the buist
followed. When management and shareholders don't give a
damn about the company's future, the company won't have a
future.
Qwest has already demonstrated that core philosophy very well.
That's why it's a virtual bust in the Baby Bell arena.
- Mohan
http://www.GaramChai.com/mohan
- Mohan
http://www.GaramChai.com/mohan
Back to employees and customers. If the customers don't like the road ahead, they don't have to stay onboard. Same for employees. Suffice to say one potential buyer stands to make more of both dissappear.
Back to employees and customers. If the customers don't like the road ahead, they don't have to stay onboard. Same for employees. Suffice to say one potential buyer stands to make more of both dissappear.
So, now married, at least Worldcom agreed to let MCI hyphenate its maiden name, and it became Mrs. MCI-Worldcom. And the marriage was a rocky one. I say it started off that way as early as the merger announcement press conference when Bernie Ebbers referred to MCI?s General Counsel Michael Salsbury (who I assume helped shape the deal) as ?What?s His Name? (because he had a hard time remembering his name). This remark illustrated to me that once the Bad Boy achieves his goal of bedding the pretty woman, he quickly loses interest and fails to even make an effort to seem interested ? like remembering the name of your merger partner?s General Counsel!
Then, because it had overextended itself financially in the courting phase, and in the acquisition of all of its other conquests, Worldcom tightened the marital budget. The wife could no longer spend money on extravagances such as coffee and water service for its employees, or even having live plant service in the offices. And when the wife wanted to travel, instead of staying in the hotel of her choice, like she used to be able to do, she now had to book rooms at lower price budget hotels.
To make matters worse, Ebber?s children didn?t get along with the MCI children. A read through TheVault.com during this period confirmed this, as employees from both companies flamed each other on this site. And when a major frame rely network went down in the summer of 1999 in the Chicago area, MCI children pointed the finger at Worldcom?s children and vice versa. And while this was happening, instead of trying to mend the relationships between the employees/children, the husband Mr. Ebbers, like all unfaithful husbands, started to cheat, lie and conceal things from the wife.
Well, we all know how the marriage went and ended in divorce (from the husband at least - the children remain). The company, with its reputation sullied, like most women that get blatantly used and taken advantage of by a lying and cheating scoundrel, seeks to restore its image. MCI, the divorcee, has gone back to using its maiden name and is now on the dating scene, not as attractive as she once was, but hey, she still looks good for her age. Recently, a stable, mature and respectable suitor in the form of Verizon has asked for MCI?s hand in marriage. MCI initially gladly responded to this request. But as happens on the dating scene, it seems that no one wants you until they see you with someone else. Then suddenly, you?re attractive again, and a good catch. So history repeated itself when Qwest gave MCI a competing marriage proposal. However, burned by its past relationship decisions and failures, MCI seems, this time around, to be favoring long-term stability over short-term financial gain.
However, MCI relatives (some shareholders) and bystanders (industry analysts and authors like the one that wrote the article) want to see if they can somehow benefit from a MCI marriage. So they push for a more risky, higher price marriage. These folks too are charmed by the Bad Boy?s lines and promises (even though the suitor in this case has considerable baggage in the form of a financial fraud scandal, and notoriously bad service), over the consistent track record of a ?Steady Eddie?.
And this is truly a last ditch effort for Qwest, which resembles a not-so-attractive man that has to buy love. So like the man who keeps going to the ATM machine outside the strip club in hopes that if he spends enough money, he can hook up with one of the strippers, Qwest keeps upping the ante. And if he gets spurned, fueled by all the alcohol he?s had, he gets aggressive and tries to force the issue ? in case this, in the form of a possible proxy fight. Normally, about this time, the club?s bouncer escorts the unruly patron from the club. And I say it?s time for the same to happen to Qwest ? they need to be shown the door ? once and for all.
So, now married, at least Worldcom agreed to let MCI hyphenate its maiden name, and it became Mrs. MCI-Worldcom. And the marriage was a rocky one. I say it started off that way as early as the merger announcement press conference when Bernie Ebbers referred to MCI?s General Counsel Michael Salsbury (who I assume helped shape the deal) as ?What?s His Name? (because he had a hard time remembering his name). This remark illustrated to me that once the Bad Boy achieves his goal of bedding the pretty woman, he quickly loses interest and fails to even make an effort to seem interested ? like remembering the name of your merger partner?s General Counsel!
Then, because it had overextended itself financially in the courting phase, and in the acquisition of all of its other conquests, Worldcom tightened the marital budget. The wife could no longer spend money on extravagances such as coffee and water service for its employees, or even having live plant service in the offices. And when the wife wanted to travel, instead of staying in the hotel of her choice, like she used to be able to do, she now had to book rooms at lower price budget hotels.
To make matters worse, Ebber?s children didn?t get along with the MCI children. A read through TheVault.com during this period confirmed this, as employees from both companies flamed each other on this site. And when a major frame rely network went down in the summer of 1999 in the Chicago area, MCI children pointed the finger at Worldcom?s children and vice versa. And while this was happening, instead of trying to mend the relationships between the employees/children, the husband Mr. Ebbers, like all unfaithful husbands, started to cheat, lie and conceal things from the wife.
Well, we all know how the marriage went and ended in divorce (from the husband at least - the children remain). The company, with its reputation sullied, like most women that get blatantly used and taken advantage of by a lying and cheating scoundrel, seeks to restore its image. MCI, the divorcee, has gone back to using its maiden name and is now on the dating scene, not as attractive as she once was, but hey, she still looks good for her age. Recently, a stable, mature and respectable suitor in the form of Verizon has asked for MCI?s hand in marriage. MCI initially gladly responded to this request. But as happens on the dating scene, it seems that no one wants you until they see you with someone else. Then suddenly, you?re attractive again, and a good catch. So history repeated itself when Qwest gave MCI a competing marriage proposal. However, burned by its past relationship decisions and failures, MCI seems, this time around, to be favoring long-term stability over short-term financial gain.
However, MCI relatives (some shareholders) and bystanders (industry analysts and authors like the one that wrote the article) want to see if they can somehow benefit from a MCI marriage. So they push for a more risky, higher price marriage. These folks too are charmed by the Bad Boy?s lines and promises (even though the suitor in this case has considerable baggage in the form of a financial fraud scandal, and notoriously bad service), over the consistent track record of a ?Steady Eddie?.
And this is truly a last ditch effort for Qwest, which resembles a not-so-attractive man that has to buy love. So like the man who keeps going to the ATM machine outside the strip club in hopes that if he spends enough money, he can hook up with one of the strippers, Qwest keeps upping the ante. And if he gets spurned, fueled by all the alcohol he?s had, he gets aggressive and tries to force the issue ? in case this, in the form of a possible proxy fight. Normally, about this time, the club?s bouncer escorts the unruly patron from the club. And I say it?s time for the same to happen to Qwest ? they need to be shown the door ? once and for all.