Monday, March 28, 2005; Page E01
As a long-time advocate for investors, it pains me to say it, but MCI Inc.'s board of directors ought to tell shareholders who oppose merging with Verizon Communications Inc. to take a hike.
It's true that Qwest Communications International Inc. is offering stockholders more money for MCI than Verizon -- $8.45 billion vs. $6.75 billion -- but merging with Qwest would be one of the dumbest deals in the history of Washington investing.
MCI already is co-champion in the D.C.'s Dumbest Deals competition.
Merging with Qwest could turn out to be an even bigger mistake than MCI's decision to sell out to WorldCom Inc., a blunder matched only by Time Warner Inc. selling itself to Dulles-based America Online Inc.
The same "take the money" mentality that produced those two disastrous mega-mergers is behind the support by many of MCI's biggest stockholders for combining with Qwest.
Unless the bids are raised -- and they may well be -- investors would get stock and cash worth $26 a share if MCI hooks up with Qwest and $20.75 if MCI goes with Verizon.
While the higher price might arguably be in the best interest of shareholders, this is one of the rare instances when the interest of the shareholders and the interest of the company are not the same. It's doubtful that a merger with Qwest would be in the best interest of MCI, its customers, its employees or the Washington region -- even if it is good for the shareholders.
There are shareholders and then there are shareholders.
The vast majority of the investors who own MCI stock are not individual investors. Nor are they the mutual funds, insurance companies or pension funds that make investments on behalf of ordinary Americans.
Most of those folks were wiped out by the bankruptcy reorganization that was necessary when the WorldCom/MCI merger was turned into a train wreck by accounting fraud, flawed business strategies and incompetent management. Those former shareholders are going to get a small part of their money back, thanks to a series of lawsuits (more about that later.)
Today's MCI stockholders are mostly hedge funds -- private pools of money, managed for the ultrawealthy by the ultrawealthy with the goal of making as much money as possible as fast as possible, damn the risk or the consequences.
"By our estimation, hedge funds make up two-thirds to 70 percent of the ownership of MCI," Friedman, Billings, Ramsey Group Inc., the Arlington investment firm, said in a recent report on the MCI maneuvering. "It is quite reasonable," the FBR report noted, "that the majority of hedge-fund investors would prefer to cash out quickly in a Qwest-MCI deal rather than wait for potential upside from a Verizon-MCI combination."
Reasonable for hedge funds, perhaps, but not for anyone else with a stake in MCI.
Most independent evaluations of the competing offers agree with the implicit premise of the FBR report: There is more long-term potential for the company that would be created by merging MCI and Verizon than for the one that would be produced by combining MCI and Qwest.
Verizon is the biggest and strongest of the regional Bell companies, Qwest the smallest and weakest -- burdened by $16.7 billion in long-term debt and so fragile that it may not be able to survive unless it finds a partner.
Qwest is willing to pay more than Verizon for MCI because it needs MCI more.
Qwest, of course, doesn't put it that way. Its executives argue that they can pay more because Qwest makes a better partner for MCI than Verizon, because they can fire more MCI employees than Verizon and because their deal is more likely to be approved by government regulators and approved quickly.
That last claim is challenged by Blair Levin, a Washington-watcher for Legg Mason Wood Walker Inc., the Baltimore investment company. Levin, a former chief of staff of the Federal Communications Commission, says either transaction could win regulatory approval. As for the timing, neither is likely to be cleared until after regulators make a decision on AT&T Corp.'s plan to merge with SBC Communications Inc., a bigger and more precedent-laden merger.
"It's probably going to be true that they are going to look at both deals together and when one [decision] comes out, the other will come out at the same time or shortly after," he said. Neither Verizon nor Qwest has gained much traction arguing that its offer is better from a regulatory standpoint, he added. "I don't think policy is going to tip the MCI decision one way or the other."
Levin approaches the merger from a regulatory and policy point of view, but analysis based on business fundamentals generally comes down on the side of Verizon. It is a financially stronger company with a stock market value of $96.28 billion compared with Qwest's market capitalization of $6.87 billion.
A $96 billion business that makes a $6.75 billion acquisition is making a modest investment. A $7 billion company that makes an $8.45 billion deal is betting the ranch.
To make that bet pay off, Qwest plans to slash expenses at MCI. Many telecom analysts are skeptical of Qwest's claim that it can cut as many as 16,000 jobs -- and do so without hurting the quality of service to customers. That "promise" alone argues that the interests of the employees and the public would better be served by a merger with Verizon, which claims fewer than half as many job cuts will be needed.
Absolutists on the issue of shareholder rights argue that neither the employees nor the customers matter. Nor does the risk that the combined company will founder down the road. If one offer gives stockholders more money today, then it should be accepted, they argue in support of Qwest (and in support of the hedge funds that are pressing MCI to take the money.)
MCI board members so far have taken a broader view of the choice. After all, they got their jobs because their predecessors were ousted during the bankruptcy and ultimately forced to pay millions in damages out of their own pockets for not stopping the accounting fraud.
But a merger decision must be ratified by stockholders, and with two-thirds of MCI's stock in the hands of quick-buck artists, that could be difficult. The worst thing that could happen -- and it's a real possibility -- is that the hedge fund stockholders hook up with Qwest and a stage a hostile takeover by voting out MCI's management.
While the future of MCI hangs in the balance, the final act of its tragic marriage to WorldCom is playing out.
Today, court proceedings are scheduled to begin in lawsuits filed on behalf of stock and bond holders against the accounting firm of Arthur Andersen LLP, which signed off on the fraudulent bookkeeping that ultimately destroyed WorldCom.
All the other defendants in the cases have settled, including the investment banks that sold WorldCom stocks and bonds based on phony financial records and the former WorldCom board members who allowed the fraud to occur. Together, they have agreed to pay $6 billion in damages, $4.8 billion to bondholders and $1.2 billion to shareholders.
Add the $433 million in restitution wrung out of Wall Street by the Securities and Exchange Commission in another case, part of which goes to WorldCom investors, and shareholders stand to get back more money than the victims of any other corporate fraud ever.
The deadline for claiming a piece of the settlement was March 4, but the courts have the authority to sweep in investors who file belated claims, said a spokesman for New York State Comptroller Alan G. Hevesi, who is supervising the cases because the state's employee pension fund was the biggest loser in the debacle. Anyone who bought WorldCom stock or bonds between April 29, 1999, and June 25, 2002 is potentially eligible to get some money back. Details on eligibility and how to file a claim can by found at
Copyright 2005 The Washington Post Company
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