The boards of both Verizon
By purchasing MCI, the No. 2 U.S. long-distance carrier, Verizon gets access to more than 14 million residential customers and 1 million corporate clients, a robust national voice-and-data network, $5.6 billion in cash and an experienced sales force. MCI, which emerged from bankruptcy protection last April, gets a secure financial partner and a new lease on life; the company, formerly known as
And both parties get what they want at a discount price, since MCI's bankruptcy proceedings left it with relatively low debt. By contrast, the recent deal between No. 2 regional provider
These deals are only the latest mergers in the telecommunications industry, which has been undergoing a period of intense contraction. Regional phone companies like Verizon and SBC have been under increasing pressure to expand nationally, particularly into corporate markets, as their local phone businesses have become less profitable.
Verizon Chief Executive
In fact, Verizon appears to have stolen MCI right out from under a competitor's nose.
A MCI-Verizon deal is particularly bad news for Qwest, which was making a last-ditch attempt to plug holes in its business and remain a player in today's marketplace. Currently the smallest of the four major regional phone companies, Qwest has a debt load of approximately $14.7 billion and has been bleeding customers. Getting its hands on MCI's profitable corporate clients could have jump-started revenue, and Qwest could have saved billions in expenses by combining operations and eliminating redundancies between their two networks.
But the merger would have been a bad deal for MCI. Qwest lacks Verizon's financial resources, putting its ability to actually pay for the merger into question, and the company's stock is considerably more volatile than that of Verizon. A combined MCI-Qwest wouldn't own a mobile telephone network, preventing it from exploiting one of the fastest-growing and most profitable areas in telephony. And there would be a serious image problem to face; both companies were the subject of massive financial scandals in the last three years, undergoing federal investigation, embarrassing income restatements, and ultimately hundreds of millions of dollars in fines and legal settlements.
Even though executives at both MCI and Verizon have struck a deal, this transaction is far from complete. Qwest could still bust the deal with a larger bid, or MCI shareholders could revolt. The merger also has to get past federal regulators, and while they're expected to approve the deal, the telecom industry is in such flux that nothing is certain.
