Is MCI
At first glance, it doesn't look like it. The long-distance telecom operator's board has accepted a cash and stock takeover offer from Bell giant Verizon Communications
When you think about MCI's long-term prospects, the deal looks pretty good. Fierce competition in the long-distance arena keeps putting pressure on MCI -- its revenues shrank another 10% in the fourth quarter. So, rather than getting stuck owning a company that will be hard-pressed to hold its value, MCI shareholders get a solid stock that offers a pretty stable financial outlook.
The trouble is, Verizon's offer comes across as stingy compared with the bid from Qwest Communications
Hold on: This is Qwest we're talking about. The runt of the Bell carriers, Qwest offers none of Verizon's stable, blue-chip trappings. Bleeding red ink and bursting at the seams with debt, Qwest has spent more time in Securities and Exchange Commission hearings fending off charges of accounting wrongdoings than signing up accounts.
Ironically, perhaps that's a good reason for MCI to at least consider Qwest's offer. While any gains for giant Verizon would probably amount to spare change, Qwest, fighting to survive as a standalone entity, has a whole lot to gain from the merger. With both companies relying on a lot of stock to fuel their takeover bids, the distinction counts for MCI shareholders.
Verizon executives say they can create cost savings and synergies worth about 7% of the combined company's $100 billon market value. So, by playing it safe and accepting Verizon's cash and share offer, MCI shareholders can expect to get at best a 5% to 10% return on the stock they receive as payment.
If they opted for Qwest's bid, MCI shareholders would get not only more cash but also stock with considerably more upside potential. MCI comes with a long list of corporate customers to whom Qwest could offer its modern network in place of MCI's outdated infrastructure. Qwest could also use MCI's $6 billon of cash and improving free cash flows to put it on firmer financial footing. The market values Qwest at just over $7 billion, so synergies could translate into dramatic share gains.
It's easy to understand MCI executives' desire to play it safe with Verizon, especially given MCI's recent past in bankruptcy. Nonetheless, that's no excuse for flatly rejecting Qwest's higher-value bid.
Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.
