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Some Shareholders Criticize MCI Decision

By Yuki Noguchi
Washington Post Staff Writer
Thursday, April 7, 2005; Page E05

MCI Inc. rejected an offer from Qwest Communications International Inc. for a third time late Tuesday, leading some MCI shareholders to grouse that they will vote against MCI's existing agreement to merge with Verizon Communications Inc.

"I haven't found a single shareholder who supports Verizon's bid," which is $7.65 billion, compared with the $8.9 billion Qwest offered in its latest bid, said William H. Miller III, chief executive of Legg Mason Capital Management Inc., which owns 5.6 million shares of MCI stock. "We are not going to support the Verizon bid. It's irrational," he said, calling the MCI board's decision "befuddled."

MCI accepted Verizon's $7.65 billion bid Tuesday night, saying Qwest's $8.9 billion bid was not superior. It cited "negative sentiment among customers." (Jennifer Szymaszek -- AP)

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MCI's decision followed nearly two months of wrangling between Verizon and Qwest. Last month, Verizon raised its bid in response to a higher offer from Qwest. Each time Qwest raised its bid, the MCI board met to consider the risks and benefits of sticking with Verizon, a bigger company with greater financial resources, or siding with Qwest, which is a smaller and weaker company.

MCI issued a strongly worded statement yesterday explaining its reasoning. It said Qwest's bid, taken as a whole, was not superior to Verizon's. "MCI's board also took into consideration a number of uncertainties in terms of value and likelihood of closing, including the negative sentiment among MCI customers toward a Qwest combination," the company said.

Sources close to the board's Tuesday night negotiations with Qwest said the board asked Qwest to raise its bid to $30 a share and assure MCI of a deal in the event unhappy MCI customers were to defect from a combined Qwest-MCI. Qwest chief executive Richard C. Notebaert rejected the request, sources said. Sources spoke only on condition of anonymity because of the privacy of the negotiations.

All parties have several options now. MCI could call for a shareholder vote on its agreement with Verizon and schedule action in June at the earliest. Or Qwest could come back to MCI with an increased offer that would prompt the long-distance giant to reconsider. Otherwise, Qwest could pursue more hostile actions, including soliciting support from MCI shareholders to vote down the Verizon deal, or call a special meeting to try to replace the existing MCI board.

Denver-based Qwest spent much of yesterday reaching out to MCI shareholders as it considered its next step.

"Qwest, I am sure, is trying to balance whether they have sufficient support from the MCI shareholders," said Muir Paterson, co-director of mergers and acquisition research with Institutional Shareholder Services in Rockville, an independent investor advisory firm. If there is insufficient support, Qwest may try tweaking its offer to ensure it has a majority of MCI shares backing its deal, he said. But shareholders are fickle, Paterson said: "There is an element of gamesmanship. [Shareholders] will support the relevant argument of the day."

With a closing price yesterday of $25.39 a share, MCI's stock is already trading above the $23.10-a-share level of Verizon's offer, suggesting most shareholders think the Qwest bid will prevail, said Legg Mason's Miller.

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