The MCI Takeover Battle: Verizon versus Qwest

The primary motivation of the acquirer corporations was to capitalize on the target company’s client base. Verizon’s objective in this merger proposal was to capture the regional market as well as to expand globally. The company was interested in the 14 million residential users and 1 million highly valued corporate clients of MCI, which controls one of the nation’s most sophisticated mobile and voice data networks. In addition, Verizon was attempting to capitalize on the strategic benefit of controlling MCI’s $5.6 billion cash rights. infrastructure of being the second largest longest distance telephone career in the USA and experienced sales force (Ewalt, 2005). On top of everything, the financial valuation of MCI was reasonable for bankruptcy proceedings left it with relatively low debt. On the other hand, Qwest has the motivation to recover from mammoth debt load of $14.7 billion, and ever-decreasing customer base (Ewalt, 2005). Furthermore, it had been undergoing financial scandals like MCI.

After emerging from bankruptcy protection and several financial scandals, MCI has the urge to merge to a financially stable company in the industry to save the business from complete shutdown.

Answer to Question No. 02

In order to retain market position of leading telecommunication company, Verizon had a pressure to expand its global business as local business profit was shrunk considerably due to saturated and competitive market condition. It had been looking for an option to recover from bad patch and increase its market share without considerable investment of time, effort and money. On the other hand, Qwest had the pressure to expand its business as it was one of the four smallest telecommunication companies of the country and was facing financial scandals.

Answer to Question No. 03

The fiduciary duties of MCI board were to maximize shareholder’s value and to improve strategic position of the company in the industry.

Answer to Question No. 04

Strengths of Verizon’s Offer

Verizon’s strong financial condition, leading market position and high brand value were adding values to its offer.

Weaknesses of Verizon’s Offer

Reduced profitability in domestic market, increased pressure to expand globally and lower price offer were the weakest points of Verizon’s offer.

Strengths of Qwest’s Offer

Higher price offer, strong presence in wireline segment and increasing growth in the telecommunication sector were the strengths of the offer.

Weaknesses of Qwest’s Offer

Weak financial balance sheet, increased debt, volatile position in share market and poor market position were the leading weaknesses of the offer.

Answer to Question No. 05

The risk arbitrageurs would take the position of merger arbitrageurs in this deal. They would try to acquire shares of MCI at lower price and try to sell them to the acquiring companies, Verizon and Qwest, at higher prices as the price deal of acquiring companies are usually higher than the market price of the company.

The position of risk arbitrageurs would change subject to the decision of MCI’s board of directors regarding the merger. If the board of directors decide to take position in favor of the Verizon, the risk arbitrageurs would try to buy shares of MCI and sell it after merger at higher prices since the share price of MCI is much lower than that of Verizon. On the other hand, since the stock price and position of Qwest is not better than that of MCI, the risk arbitrageur would not buy shares of Qwest at lower prices and sell it at a higher price after merger.

Answer to Question No. 06

The exhibit 7 displays the stock price histories of three companies from February 1, 2005 to March 29, 2005, the time between which the merger was proposed and took place. The structure explains how the stock prices were varying with the changing bids of the two companies. For example, as soon as Verizon offers it bid to the MCI, stock price of both the companies get higher. Similar pattern can be seen in the rest of the two structures. However, the stock price moves with the speculation of which company has the better chance of owning MCI. For example, during 14th February, 2015, stock of all three companies fall simultaneously; the stock of MCI falls because it approves the lower bid of Verizon, the stock of Verizon falls because it is going to invest in a merger and the stock of Qwest falls because of MCI’s decision in favor of Verizon.

In each structure, the MCI shareholders are likely to experience a differing interest. For example, they would fail to recognize a price advantage if Verizon takes over MCI but the stability of the stock would eventually benefit them in the long run. On the other hand, the short-term stock price would be higher if Qwest takes over but it will eventually dies out due to financial instability of Qwest.

Answer to Question No. 07

Verizon has a much better market position and stock history than Qwest, which is keeping it in the bid. However, MCI board of directors cannot simply accept its offer because it is lower than that of Qwest. In order to get its bid accepted, Verizon may offer different financial benefits in terms of cash offering, terms and conditions. On the other hand, despite having offered a better price bid and more flexible financial terms, MCI board of directors were not accepting their bid due to poor financial condition as well stock history. In order to get their offer accepted, the company may offer higher prices and more shares to MCI to compensate for its poor market condition.

Answer to Question No. 08

I would recommend accepting Verizon’s offer for three main reasons. Firstly, Verizon’s market position; the company has been operating in the industry since 1980s and has become one of the largest telecom companies of the world. Its overall market share and experiences are worth million dollars. Secondly, the company has a better stock history and financially stable shares in the market. Thirdly, the possibility of building a successful business after merger is higher with Verizon than Qwest. Verizon has a successful history of turning mergers into successful businesses. With Verizon, MCI stands more chances of avoiding bankruptcy and facing further financial challenges than with Qwest. If the rate of success, market position and strong financial proposition of Verizon can be translated into prices, the price offer of Verizon might seem double of what Qwest offers in cash. Considering all these reasons, I prefer merger with Verizon as it will give the company better chances of survival.

References

Ewalt, D. M. (2005, February 14). Verizon To Acquire MCI For $6.8B. Forbes.