Verizon, Slim use greenmail from 1980s in their side deal

April 13, 2005|By Jay Hancock

VERIZON Communications, preferred merger suitor of long-distance operator MCI (formerly WorldCom), is offering only $23.10 per share in cash and stock to most MCI shareholders.

But Verizon just agreed to pay Mexican telecom billionaire Carlos Slim Helu $25.72 for his MCI shares, and all in cash, too. It's a two-tiered deal that recalls similar lopsidedness from years ago, called greenmail.

In the 1980s, when U.S. corporations were fat, managers were entrenched and corporate raiders were in their heyday, a quick buck could be made by buying shares in a certain company, blustering about a takeover attempt and then reselling the stock back to the company at a big premium as the price for going away.

The Verizon/Slim (pronounced sleem) deal is a little different. Slim was a dark horse to take over MCI, although The Wall Street Journal reported that he contemplated combining it with his other telecom holdings. But Verizon has made a formal offer for MCI, and so has Qwest Communications, which offered to pay $27.50 per share in cash and stock to all MCI shareholders.

Slim, who as recently as a month ago had opposed Verizon's offer for MCI as too low, is employing his advantage as a major owner to sell back shares in a sweetened deal unavailable to lesser shareholders. That was the essence of 1980s greenmail.

His $25.72 a share is 11 percent more than what Verizon is offering other MCI shareholders. Buying his 13.4 percent stake would leave Verizon as MCI's biggest shareholder, give it greater power to block a Qwest bid and send it far toward acquiring the whole company.

Other MCI stock owners, of course, are furious.

"Shareholders would be outraged if the [MCI] Board did less than insist that the identical terms be made available to all other owners," Legg Mason mutual-fund star Bill Miller wrote to MCI on Saturday. (Well, MCI shareholders would be outraged. Verizon shareholders would be outraged if Verizon caved in to Miller's demand if it didn't have to.)

Legg Mason owns 5.6 million MCI shares, worth $144 million at the Slim price but only $129 million at the price Verizon has offered the hoi polloi.

It's an old story. Smaller shareholders get shafted while big ones reap the advantages of power and volume.

"Small" is relative, and one should not let sympathy be unconfined. The "underdogs" here include Miller as well as merger arbitrageurs who dart in and out of takeover stocks and vulture investors who bought WorldCom junk bonds for cents on the dollar during bankruptcy proceedings knowing they would convert into MCI stock.

Little Red Riding Hood they ain't.

And minority shareholders in this country have far more rights than they do in, say, Russia, where minority stakes can shrink or disappear amid 10 kinds of shenanigans.

But there is a larger issue that hearkens to takeovers past in another way.

What is the MCI board's duty? To get the highest possible price and worry less about consequences? Or to choose the best possible merger partner and worry less about price?

MCI's board has rejected Qwest's $27.50 bid and agreed to pair with Verizon at $23.10, arguing that the higher Qwest offer doesn't make up for that company's inferior financial condition and other "uncertainties" surrounding the deal.

Qwest, a telecom provider based in Denver, loses money more quarters than not, carries around $17 billion in debt and has seen its stock plunge from $64 at the height of the stock bubble to below $4 these days. Buying Verizon would probably pile on even more debt, which Qwest executives say could be paid down by reaping efficiencies.

Yesterday Qwest again blasted what it called "the wide discrepancy between the shareholder value Qwest offered and Verizon's lower offer."

But boards have broad leeway to steer corporations without being obligated to squeeze out every last penny for shareholders right now.

In a famous 1960s case, courts rebuffed a minority Chicago Cubs shareholder who contended that team owner Philip Wrigley had a duty to maximize profits by installing lights at Wrigley Field. Wrigley was concerned about annoying neighbors and besmirching baseball tradition, and the courts said that was fine under the "business judgment" latitude given to corporate overseers.

MCI's board seems to be well within its rights to spurn Qwest if that's what it wants. And the market suggests it'll eventually get a better offer from Verizon anyway: MCI stock closed yesterday at $26.09. That's even more than the Slim price, although he would get his money soon while regular shareholders would have to wait many months for the merger to close.

What will be interesting is if other big shareholders in other deals try to imitate Slim. Greenmail and hostile takeovers are harder to do these days thanks to "poison pills," smarter use of state-based anti-takeover laws and other defenses.

But corporate mergers continue apace, and if you're Verizon, sometimes it's easier to pay off a deal blocker such as Slim than to take your chances in a proxy battle for the little guys.

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