MCI Accepts Verizon Bid; Qwest Ends Pursuit

Verizon Communications Inc. (VZ) won its 10-week battle for MCI Inc. (MCIP) Monday, as Qwest Communications International Inc. (Q) withdrew its $9.9 billion bid after MCI accepted Verizon's $8.5 billion offer.

MCI (search) said it accepted Verizon's lower price because its large business customers had threatened to defect if it was sold to Qwest (search). Qwest did not go quietly, accusing MCI of tilting the bidding war in Verizon's favor and short-changing shareholders.

"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the company said in a statement.

Verizon (search), the largest U.S. telecommunications company, will gain control of the second-largest U.S. long-distance telephone company and the No. 2 provider of telecommunications services to large businesses and governments. Shares of MCI fell sharply after Qwest ended its bid.

Verizon's winning offer provides at least $26 per MCI share, with $5.60 cash to be paid upon approval of the deal by MCI shareholders, plus either 0.5743 Verizon share for every share of MCI common stock or Verizon shares valued at $20.40, whichever is greater.

Verizon's prior bid was for $23.50 a share, including an MCI dividend of 40 cents a share. Qwest's current offer, which it had called its "best and final bid" was for $9.9 billion, or $30.40 per share including MCI's 40-cent dividend.

MCI's board justified accepting Verizon's lower offer by saying that several of MCI's large customers preferred a Verizon deal over one with Qwest, and that "a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction."

MCI has about 60,000 large-business customers and roughly 1 million small-business subscribers. It also runs one of the largest Internet backbones and global data networks and has some 13 million residential telephone customers.

MCI's stable of large corporate and business customers, second only to AT&T Corp.'s (T), is the major motivation behind Verizon's and Qwest's efforts. Qwest also saw the opportunity to cut $14.8 billion in costs through an MCI deal, providing its best chance to reduce its $17 billion in debt and improve its weak cash flow.

"Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value," Qwest said.

Both Qwest and Verizon began exploring a possible deal with MCI last July. After MCI accepted Verizon's original $6.75 billion offer in February, Qwest responded with a $7.6 billion bid.

The ensuing tug-of-war has given MCI a richer valuation, on an enterprise value-to-cash flow basis, than AT&T, which is being bought by SBC Communications (SBC) for $16 billion. Since speculation about a possible buyout began in December, MCI's shares have risen 40 percent.

Some MCI shareholders, particularly large institutional investors, had already spoken out against Verizon's lower bids and urged MCI to negotiate a richer deal with Qwest. But some Verizon shareholders had grown uneasy over the high price for MCI.

Verizon has said it expects to generate $7 billion in savings and other benefits from the MCI deal and to cut about 7,000 jobs. The two companies expect regulators to approve the deal next year.

MCI shares fell 89 cents, or 3.4 percent, to $25.64 on Nasdaq, while shares of Verizon fell 99 cents, or 2.8 percent, to $34.80 on the New York Stock Exchange in afternoon trading. Qwest shares rose 8 cents, or 2.3 percent, to $3.50 on the NYSE.