After weeks of tough trench warfare, Qwest Communications International Inc. scored an important victory in its campaign to take over MCI Corp. when that long-distance carrier decided yesterday that Qwest's latest offer, nearly $10 billion, was "superior" to a lower bid from rival suitor Verizon Communications Corp.
It wasn't a total victory, however: Verizon has five business days to boost its current $7.5 billion offer, and during that time MCI's board of directors will leave in place its recommendation that the company choose Verizon as its merger partner.
Facing a 5 p.m. take-it-or-leave-it deadline imposed by Denver-based Qwest, MCI was forced yesterday to rule that Verizon's offer just wasn't enough. Qwest's latest bid is a cash-and-stock offer of $30 a share, or $9.75 billion. Verizon has offered $23.10 a share in cash and stock.
Richard C. Notebaert, the Qwest chief executive officer who has been campaigning for nearly a year to buy MCI, had launched a full frontal assault in recent weeks to trump the much-larger and better-financed Verizon. But victory came only after a group of top MCI shareholders - including Legg Mason Capital Management - apparently outflanked Verizon by vowing to put up $800 million in cash so that Qwest could boost its bid for the third time.
"Qwest is gratified that MCI has recognized its superior offer for MCI," Qwest said in a company statement. "Through this combination, both the fundamental economics and the future competitive landscape of the telecommunications industry can be aligned to deliver long-term value for investors, robust competition and better services for customers."
In a statement, Verizon said that it still "believes its pending transaction with MCI creates long-term, as well as short-term, value for the shareholders of both companies by protecting the integrity of MCI's business, ensuring MCI's customers have continuing access to the best communications services, retaining key employees, and stabilizing MCI's financial position and prospects."
Legg Mason officials confirmed Friday that the company was funneling undisclosed millions to Qwest, a decision largely motivated by star fund manager William H. Miller III.
Miller has been an outspoken opponent of the Verizon-MCI merger because of Verizon's lower offer, and because of a controversial side deal with a major MCI shareholder who will be paid $2.62 per share more than Verizon is offering for the rest of that company. Miller was angered when it was revealed that Verizon is buying Mexican telecom tycoon Carlos Slim's 43.4 million MCI shares - representing slightly more than 13 percent of the company - for $25.72 per share.
Legg Mason Capital Management, New York-based hedge fund Omega Advisors, American Express Co. and Citadel Investment Group LLC are among a group of at least five MCI shareholders who in aggregate hold 13 percent of that company's stock - and who have banded together to pony up the $800 million in cash that Qwest used this week to sweeten its earlier offer. That highly visible pressure, as much as the heightened bid, is likely what pushed MCI to declare Qwest's bid superior, experts say.
Only a few short years ago, a hostile suitor might have had to resort to a long and costly proxy fight, and even then might not induce the board of the company it was targeting to change its stance.
"Telecommunications technology has pushed us into an era of transparency," where a greater amount of much-more detailed information is almost instantly available to masses of shareholders, said Eugene Fram, the J. Warren McClure research professor at the Rochester Institute of Technology College of Business.
And fund managers such as Miller are having to take much more active stances for a reason: As more and more money is pushed into mutual funds, managers who wish to keep beating the market averages are having to take larger and more concentrated positions in the stocks of the companies they invest in. For that reason, they must now be active stewards of their holdings, to make sure they extract every dollar they can for the shareholders of their funds, said Jeff C. Keil, a vice president and corporate governance expert for Lipper Inc., a Denver-based investment-research firm.
"They have an obligation to their own shareholders" to be so active, Keil said.
Verizon has until Friday to make a counter offer. Its CEO, Ivan Seidenberg, must decide whether MCI is worth $10 billion. Verizon for several years has eschewed the notion of buying a long-distance carrier but changed its stance after arch-rival SBC Communications Inc. made a deal this year to buy AT&T. SBC and Verizon hope to use long-distance carriers to gain access to large business and government network customers.
Many MCI shareholders have been unhappy with the board's willingness to accept lower remuneration from Verizon. MCI's board has reasoned that Qwest's shaky financial status makes a deal with that company risky. The carrier's $17 billion in debt is nearly double its net worth.
Qwest's Notebaert is seeking to acquire MCI in the hopes that combining its long-distance network with Qwest's will lead to significant savings, elimination of 12,000 or more jobs and increased efficiencies. Also, MCI, which emerged from bankruptcy protection last year, has a healthy balance sheet that could bolster Qwest's unstable financial status.
Sun staff writer Phillip McGowan, Bloomberg News and the Chicago Tribune, a Tribune Publishing newspaper, contributed to this article.