The MCI Takeover Battle Verizon versus Qwest

Substantive Issues: MCIs board of directors was considering competing purchase offers from Verizon
and Qwest. Qwest a smaller company with a weaker balance sheet was offering almost a billion dollars
more for MCI. Whereas, Verizon, one of the largest telecommunications companies in the world, while
apparently lower in price, may actually provide greater value to the MCI shareholders based upon its
history of successful mergers and acquisitions, stock evaluation and financial stability.
The board of MCI must weigh the two offers, with its fiduciary responsibilities to shareholders in mind.
The past history of MCI, Verizon, Qwest and telecom mergers more generally, is particularly salient.
The Companies:
Verizon, dominates the northeast telecommunications market. Formerly sheltered from some competition
by government regulations, Verizon now faces competition from long-distance, local baby bell, wireless
cell phone companies. Since deregulation, Verizon has lost millions of customers to telephone service
provided on cable TV wires, reduced its workforce by 30 percent, and added new business such as
wireless telecommunications. Verizon is trying to overcome a monopoly mentality, and is taking
actions to upgrade existing customers to newer services and laying high-speed fiber-optic cables.
Competition from all areas of the industry is intense. Verizon needs to monitor all parts of its external
environment most particularly the political/legal category. The governments deregulation of the
telecommunications industry has created major changes to which the companies must adapt or suffer. The
technological aspect of the industry is rapidly changing as well, which complicates Verizons competitive
environment. For example, it is spending a vast amounts of money to lay fiber-optic cables as well as
adding wireless capabilities. In order to meet these challenges, the company has a history of successful
acquisitions as demonstrated in exhibit one the case.
Porters 5 Forces and Telecommunications
The number of firms competing with one another has greatly increased. These new entrants were made
possible by changes in government policy (deregulation). This has been sufficient to increase the
competitive rivalry in the industry, and is the underlying cause of much of Verizons struggle. To some
extent substitute products are an issue, if one considers telephone service offered over cable wires a new
product.
Because of deregulation Verizon is entering new industries and encountering new competitors, so it must
analyze its competitors closely. It must understand their strategic intent, their strategies, and their
strengths and weaknesses. With this knowledge, and Verizons knowledge of its own strengths and
weaknesses, Verizon can develop a strategic plan, both company-wide and for each industry in which it
now competes.
As Verizon enters new businesses such as long-distance, internet services and cable TV, it will be seen as
a threat by existing companies in these industries, and the reaction may be for these companies to lower
prices for their services and products in order to make the industries unprofitable for Verizon. These
companies will probably try to differentiate their products from Verizons by adding features or entirely
new products. It is possible these firms will try to increase existing customers costs of switching to
Verizon services, and make it easier for Verizon customers to switch to them. If there are numerous
existing competitors or if the competitors are equally balanced, then rivalry will intensify with Verizons
entrance.

The Deal for MCI

Verizons offer to the board was $7.6 billion in total consideration, or $23.50 per MCI common share. The
cash-stock split was $8.75 cash and $14.75 in stock per share of MCI. Additionally, Verizon agreed to
issue no fewer than 0.4062 shares of Verizon for each share of MCI stock. At the time, Verizons share
price was $36.31 per share, paid an annual dividend of $1.62 per share and had an implied volatility of
19% (HBS Case pg. 5) Verizon would issue 138,120,000 new shares of stock, roughly a 5% increase in
the number of shares outstanding. This issue would not dilute existing earnings and would pay MCI
shareholders an annual dividend of $223,754,400. (The net present value of the dividend stream
discounted at 6.5% is $4.25 billion assuming dividends remain the same for 20 years)