http://www.washingtonpost.com/wp-dyn/articles/A5750-2005Mar27.html
By Jerry Knight
Monday, March 28, 2005; Page E01
As a long-time advocate for investors, it pains me to say it, but
MCI Inc.'s board of directors ought to tell shareholders who oppose
merging with Verizon Communications Inc. to take a hike.
It's true that Qwest Communications International Inc. is offering
stockholders more money for MCI than Verizon -- $8.45 billion
vs. $6.75 billion -- but merging with Qwest would be one of the
dumbest deals in the history of Washington investing.
MCI already is co-champion in the D.C.'s Dumbest Deals competition.
Merging with Qwest could turn out to be an even bigger mistake than
MCI's decision to sell out to WorldCom Inc., a blunder matched only by
Time Warner Inc. selling itself to Dulles-based America Online Inc.
The same "take the money" mentality that produced those two disastrous
mega-mergers is behind the support by many of MCI's biggest
stockholders for combining with Qwest.
Unless the bids are raised -- and they may well be -- investors would
get stock and cash worth $26 a share if MCI hooks up with Qwest and
$20.75 if MCI goes with Verizon.
While the higher price might arguably be in the best interest of
shareholders, this is one of the rare instances when the interest of
the shareholders and the interest of the company are not the
same. It's doubtful that a merger with Qwest would be in the best
interest of MCI, its customers, its employees or the Washington region
-- even if it is good for the shareholders.
There are shareholders and then there are shareholders.
The vast majority of the investors who own MCI stock are not
individual investors. Nor are they the mutual funds, insurance
companies or pension funds that make investments on behalf of ordinary
Americans.
Most of those folks were wiped out by the bankruptcy reorganization
that was necessary when the WorldCom/MCI merger was turned into a
train wreck by accounting fraud, flawed business strategies and
incompetent management. Those former shareholders are going to get a
small part of their money back, thanks to a series of lawsuits (more
about that later.)
Today's MCI stockholders are mostly hedge funds -- private pools of
money, managed for the ultrawealthy by the ultrawealthy with the goal
of making as much money as possible as fast as possible, damn the risk
or the consequences.
"By our estimation, hedge funds make up two-thirds to 70 percent of
the ownership of MCI," Friedman, Billings, Ramsey Group Inc., the
Arlington investment firm, said in a recent report on the MCI
maneuvering. "It is quite reasonable," the FBR report noted, "that the
majority of hedge-fund investors would prefer to cash out quickly in a
Qwest-MCI deal rather than wait for potential upside from a
Verizon-MCI combination."
Reasonable for hedge funds, perhaps, but not for anyone else with a stake
in MCI.
Most independent evaluations of the competing offers agree with the
implicit premise of the FBR report: There is more long-term potential
for the company that would be created by merging MCI and Verizon than
for the one that would be produced by combining MCI and Qwest.
Verizon is the biggest and strongest of the regional Bell companies, Qwest
the smallest and weakest -- burdened by $16.7 billion in long-term debt and
so fragile that it may not be able to survive unless it finds a partner.
Qwest is willing to pay more than Verizon for MCI because it needs MCI
more.
Qwest, of course, doesn't put it that way. Its executives argue that
they can pay more because Qwest makes a better partner for MCI than
Verizon, because they can fire more MCI employees than Verizon and
because their deal is more likely to be approved by government
regulators and approved quickly.
That last claim is challenged by Blair Levin, a Washington-watcher for
Legg Mason Wood Walker Inc., the Baltimore investment company. Levin,
a former chief of staff of the Federal Communications Commission, says
either transaction could win regulatory approval. As for the timing,
neither is likely to be cleared until after regulators make a decision
on AT&T Corp.'s plan to merge with SBC Communications Inc., a bigger
and more precedent-laden merger.
"It's probably going to be true that they are going to look at both
deals together and when one [decision] comes out, the other will come
out at the same time or shortly after," he said. Neither Verizon nor
Qwest has gained much traction arguing that its offer is better from a
regulatory standpoint, he added. "I don't think policy is going to tip
the MCI decision one way or the other."
Levin approaches the merger from a regulatory and policy point of
view, but analysis based on business fundamentals generally comes down
on the side of Verizon. It is a financially stronger company with a
stock market value of $96.28 billion compared with Qwest's market
capitalization of $6.87 billion.
A $96 billion business that makes a $6.75 billion acquisition is making a
modest investment. A $7 billion company that makes an $8.45 billion deal is
betting the ranch.
To make that bet pay off, Qwest plans to slash expenses at MCI. Many
telecom analysts are skeptical of Qwest's claim that it can cut as
many as 16,000 jobs -- and do so without hurting the quality of
service to customers. That "promise" alone argues that the interests
of the employees and the public would better be served by a merger
with Verizon, which claims fewer than half as many job cuts will be
needed.
Absolutists on the issue of shareholder rights argue that neither the
employees nor the customers matter. Nor does the risk that the
combined company will founder down the road. If one offer gives
stockholders more money today, then it should be accepted, they argue
in support of Qwest (and in support of the hedge funds that are
pressing MCI to take the money.)
MCI board members so far have taken a broader view of the
choice. After all, they got their jobs because their predecessors were
ousted during the bankruptcy and ultimately forced to pay millions in
damages out of their own pockets for not stopping the accounting
fraud.
But a merger decision must be ratified by stockholders, and with
two-thirds of MCI's stock in the hands of quick-buck artists, that
could be difficult. The worst thing that could happen -- and it's a
real possibility -- is that the hedge fund stockholders hook up with
Qwest and a stage a hostile takeover by voting out MCI's management.
While the future of MCI hangs in the balance, the final act of its
tragic marriage to WorldCom is playing out.
Today, court proceedings are scheduled to begin in lawsuits filed on
behalf of stock and bond holders against the accounting firm of Arthur
Andersen LLP, which signed off on the fraudulent bookkeeping that
ultimately destroyed WorldCom.
All the other defendants in the cases have settled, including the
investment banks that sold WorldCom stocks and bonds based on phony
financial records and the former WorldCom board members who allowed
the fraud to occur. Together, they have agreed to pay $6 billion in
damages, $4.8 billion to bondholders and $1.2 billion to shareholders.
Add the $433 million in restitution wrung out of Wall Street by the
Securities and Exchange Commission in another case, part of which goes
to WorldCom investors, and shareholders stand to get back more money
than the victims of any other corporate fraud ever.
The deadline for claiming a piece of the settlement was March 4, but
the courts have the authority to sweep in investors who file belated
claims, said a spokesman for New York State Comptroller Alan
G. Hevesi, who is supervising the cases because the state's employee
pension fund was the biggest loser in the debacle. Anyone who bought
WorldCom stock or bonds between April 29, 1999, and June 25, 2002 is
potentially eligible to get some money back. Details on eligibility
and how to file a claim can by found at www.worldcomlitigation.com.
Copyright 2005 The Washington Post Company
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