MCI to Hold Talks with Qwest

Qwest Communications International Inc.s pleas for MCI to seriously consider its revised $8 billion takeover bid have apparently fallen on receptive ears.

MCI Inc. said today it will talk with Qwest about the latest proposal, and that Verizon Communications Inc. the company first in line for the acquisition has given MCI a two-week window in which to review Qwests new offer.

Qwest Chairman and CEO Richard Notebaert has spent the past two weeks publicly campaigning for MCI to give its bid more consideration. He sent two letters to MCI one to its board of directors and the other to MCI Chairman Nicholas Katzenbach asserting a Qwest-MCI combination represents a more favorable scenario for MCI.

MCI says its board of directors decided to look at Qwests offer more intently after reviewing changes in the telecommunications industry during the past year. Bloomberg reported shareholders also were pressuring the board to give Qwests bid more thought.

In a statement released today, Verizon said it still sees a Verizon-MCI deal as best for the industry and consumers.

Verizon, the biggest U.S. phone company, announced plans in mid-February to acquire MCI in a deal valued at $6.75 billion.

MCI, which emerged last year from the largest bankruptcy in U.S. history, rejected an offer by Qwest for about $8 billion. Qwests revised $8 billion offer included changes to its cash-and-stock offer, but the mix and the overall bid price remained the same as the first proposal.

New York-based Verizon has a market value of $101.1 billion, while Denver-based Qwest has a market value of $7.3 billion.

Either Qwest or Verizon will acquire a company whose sales have been falling for years. Annual revenue at MCI dropped 15 percent to $20.7 billion, largely driven by declining sales in its consumer unit. The Ashburn, Va., company said it expected revenue to drop this year by 10 percent to 14 percent. AT&T Corp., MCIs traditional long-distance rival, has seen similar declines. During testimony Wednesday before Congress on the rash of telecom mergers including the planned combination of AT&T and SBC Communications Inc. AT&T Chairman and CEO Dave Dorman said revenue at AT&T declined from $49.6 billion in 1999 to $30.5 billion in 2004.

If Verizon prevails in the bidding war for MCI, it would likely be competing fiercely for corporate customers with the second largest regional Bell operator: SBC. SBC and Verizon, the two biggest incumbent phone companies, have been allies before lawmakers and regulators not big rivals in the marketplace. But by acquiring AT&T and MCI, SBC and Verizon likely would battle for the same valuable corporate and government customers.

Dorman said Wednesday the AT&T-SBC merger would lead to more competition between the Bells.

The Bells today already compete against one another for wireless services. With this merger, the combined company will be competing for large business customers across the nation and very much in the local service territories of the other Bell companies, he said.

In the meantime, telecom industry analyst Jeff Kagan says todays turn of events indicate a strange merger. We expected to see the two companies competing and bidding the price up, he says of Verizon and Qwest. Now that Qwest has made it clear that they want MCI too, and now that Verizon was gracious enough to give MCI permission to talk with Qwest, I think we’ll have a decision soon. it was a good idea for Verizon to take the high road and let MCI talk with Qwest. This way whatever happens and whoever wins, it should be a fair fight for both companies.

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