Qwest offers MCI $8.9 billion

Latest counter to Verizon sets stage for proxy fight


Signaling its refusal to back down from a two-month bidding war, Qwest Communications International has once again raised its offer for MCI.

The fresh offer of $8.9 billion, made yesterday, was made two days after MCI's board tried to end the contest by accepting a $7.6 billion bid from Verizon Communications. Qwest's new bid would give MCI shareholders $27.50 a share, with $13.50 in cash and the rest in stock.

Qwest had previously offered $8.45 billion, or $25.60 a share, in cash and stock. The new offer increases the cash component from $10.10 and protects MCI shareholders from any decline in Qwest's share price by guaranteeing that they receive $14 in stock as long as Qwest's shares trade within 20 percent of their current price.

Qwest also said it had the ability to raise $2 billion in additional private equity financing to allow stockholders to exchange their MCI shares for cash.

The Denver-based phone company has asked MCI to respond to its new bid, which is 19 percent more than Verizon's offer, by Tuesday. "We put a superior offer on the table for MCI that addresses shareowner concerns," said Tyler Gronbach, a Qwest spokesman.

Qwest's latest move sets the stage for a potentially nasty proxy fight in which MCI shareholders would be asked to choose between the bids.

Under the terms of its most recent deal with Verizon, MCI's board can conclude that Qwest's offer is superior. But MCI's board cannot scrap its deal until Verizon has had a chance to take its bid directly to a shareholder vote.

Further, Verizon's chief executive, Ivan G. Seidenberg, said this week that he was prepared to take his company's offer directly to MCI shareholders. On Wednesday, Qwest said it had hired a proxy adviser group to survey shareholders and possibly prepare for a vote.

Investors appeared to be skeptical of Qwest's ability to persuade MCI's board to abandon its deal with Verizon, even with the higher bid. Qwest's stock dropped as much as 5.6 percent after the offer was made public. Its shares closed down 7 cents, or 1.9 percent, at $3.70; Verizon shares rose 7 cents, to $35.50; and MCI shares rose 45 cents, to $24.90.

MCI's board has justified its decision to accept Verizon's lower offer by arguing that Verizon is a much stronger company and is a better long-term value for shareholders. Despite criticism from a vocal group of MCI shareholders who want to accept Qwest's higher offer, MCI's directors have maintained that they have to use broad criteria to assess the merits of the competing bids.

In its corporate governance guidelines put into effect in January 2004, before it emerged from bankruptcy protection, MCI said the role of its board included maximizing "the long-term value of the company for its shareholders" but also "addressing the concerns of other interested parties including employees, customers, suppliers, government and regulatory officials, communities and the public at large."

The broader definitions were added to rebuild trust in MCI, according to Scott C. Cleland, an industry analyst at the Precursor Group. MCI was previously called WorldCom, which collapsed in July 2002 after an $11 billion fraud was uncovered.

Given the fraud at WorldCom, federal regulators have tried to turn MCI into "the poster child of corporate governance reform," Cleland wrote in a research report.

The company's management was purged after the fraud. MCI's board now includes Nicholas deB. Katzenbach, a former U.S. attorney general, and Dennis R. Beresford, a former chairman of the Financial Accounting Standards Board. In addition, Richard C. Breeden, an independent court-appointed monitor, attends all board meetings.

"Given the extraordinary emphasis the government placed on `restoring trust' at MCI, in this context we suspect this board is focused on more than just price," Cleland wrote.

Still, Richard C. Notebaert, Qwest's chief executive, has refused to take no for an answer. He has said that his company, though far smaller than Verizon, presents MCI with major strategic opportunities. Qwest and MCI operate global networks that carry voice and data for other carriers and could be combined to create a big participant in that industry.

Notebaert has also criticized MCI's board for not considering Qwest's bids more seriously. In a letter to the Securities and Exchange Commission yesterday, he accused the board of keeping Qwest in the dark while negotiating a better deal with Verizon.

"We were particularly dismayed that MCI did not contact us to discuss our willingness to adjust our offer prior to signing the amended merger agreement" with Verizon, Notebaert wrote.

Brad Burns, an MCI spokesman, said, "We have full confidence that our governance has been and continues to be appropriate."

MCI's board, he said, will review Qwest's latest offer.

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