You have to wonder sometimes if people have basic math skills. To wit:
8.2 billion > 7.5 billion.
The first number is the market capitalization of MCI. The second is the value of the offer that telecommunications carrier Verizon
So why in the world, given that Verizon's offer has been accepted, would investors run the share price of MCI
The reason is quite logical. They're forecasting that MCI will eventually be purchased at a substantially higher price.
In the words of Tony Montana, "Say hello to my little friend."
That friend, of course, is Qwest
You're inferior. Give us more.
On a call last night, MCI's executives asked Qwest to raise its bid to $30 per share, or $9.7 billion. Qwest, which at this point has already substantially outbid Verizon, declined. As such, MCI reaffirmed that it would go forward with Verizon. Qwest now has to decide whether it will give up on its bid, or approach MCI's board directly, or even wage a proxy battle. If it chooses to do the latter, it has some substantial allies who are MCI shareholders.
As far as I'm concerned, MCI's asking Qwest to up its offer showed to all what MCI's executive team was about. We've determined what that is; now all we need to decide is the price. One of the elements of MCI's request for a sweetened offer is better retention bonuses for its main executives.
Ah, yes, but the Verizon offer, at 20% less than the Qwest one, is superior. That brings a question to my mind. For whom?
The argument goes (and it is not without merit) that Verizon is a substantially stronger company, with a much more stable stock price; that MCI's customers would be much more likely to be happy with Verizon over Qwest; that Verizon has substantial assets that Qwest does not; and that Qwest's share price is much more volatile than Verizon's. In this regard, the MCI board is able to claim that a substantially lower-priced Verizon bid is actually superior to the one from Qwest.
Many MCI investors are not fooled. In an open letter to MCI board chairman Nicholas Katzenbach, Legg Mason Value Trust
Miller wonders aloud whether the MCI board's apparent concern for the risks involved in Qwest are dramatically overstated. He notes that MCI's shareholders are "manifestly a group that is not risk-averse, owning as it does shares in a company that was the subject of the largest fraud and bankruptcy in U.S. history, a company operating in an industry plagued by overcapacity, and a company whose revenue is shrinking with no clear end in sight."
Just what is it about MCI that says "long-term" to you?
Miller then goes on to say, essentially, that the reason his funds own MCI is that it is extremely cheap. Note that he says nothing about the excellence of management, or of operations, or anything of the sort. MCI is cheap, and in such situations, we look for a higher value to be realized. Heck, most MCI owners I know don't even like the company or its management. They see it as a cash-flow machine, and a takeover target, nothing more.
As such, the burden of showing why rejecting a Qwest offer that is not just slightly but substantially more lucrative in the short run than the one from Verizon falls squarely on the board of directors. This is the event that many investors in MCI have been waiting for -- the "liquidity event," if you will. "Long-term stability?" Please. Show me the money, and save your self-righteousness.
Given the comments by Miller, on the heels of others from Carlos Slim, the Telmex
Miller notes in his letter that the Legg Mason funds also own a substantial stake in Qwest, given a belief that the market substantially underestimates the value of the company. He believes that both the short-term and the long-term benefits of a Qwest/MCI merger, with MCI's shareholders enjoying a 40% stake in the combined companies, far outweighs the 5% stake of Verizon they'd yield. He acidly states: "If we thought the shares of Verizon offered similar potential, we would own them. We do not." He also pointed out that any shareholder who really had the same concerns as the board professes has had ample opportunity to sell shares on the open market at a price that is above the price of the Verizon offer.
At the very minimum, this is going to make for an interesting test of corporate governance: What degree of latitude do boards have in accepting a lower-dollar-amount offer for a company? There should be no question that boards must be able to exercise such judgment, as every merger and acquisition scenario offers nearly infinite complexities that exceed a simple consideration of price. But come on, we're talking about a 20% premium, and while Qwest has not yet completely recovered from all of the repercussions from its near-collapse three years ago, it's certainly not in similar straits today.
It is amazing, though, how far the mighty have fallen. In 2000, Qwest was a $65 billion company; the market cap of MCI's predecessor, WorldCom, exceeded $200 billion. Now MCI's just fodder to the Baby Bells, and Qwest desperately needs it to get into the consolidation game, which has taken off without it.
It will be an interesting ride from here: The stock price, which has as of this point risen today in the wake of the MCI reaffirmation, doesn't speak of much confidence among MCI's investors that the last refrain has been played.
Bill Mann does not own shares of any company in this story. He does love Scarface, though. Bill is the guest analyst for the next four months at theMotley Fool Hidden Gems newsletter. The Fool isinvestors writing for other investors.
