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Plan to Merge MCI, Qwest Has A Sour Ring to It

Today's MCI stockholders are mostly hedge funds -- private pools of money, managed for the ultrawealthy by the ultrawealthy with the goal of making as much money as possible as fast as possible, damn the risk or the consequences.

"By our estimation, hedge funds make up two-thirds to 70 percent of the ownership of MCI," Friedman, Billings, Ramsey Group Inc., the Arlington investment firm, said in a recent report on the MCI maneuvering. "It is quite reasonable," the FBR report noted, "that the majority of hedge-fund investors would prefer to cash out quickly in a Qwest-MCI deal rather than wait for potential upside from a Verizon-MCI combination."

Qwest Communication's headquarters in Denver looms over MCI's branch offices. Qwest wants to buy MCI for $8.45 billion. (Jack Dempsey -- AP)

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Reasonable for hedge funds, perhaps, but not for anyone else with a stake in MCI.

Most independent evaluations of the competing offers agree with the implicit premise of the FBR report: There is more long-term potential for the company that would be created by merging MCI and Verizon than for the one that would be produced by combining MCI and Qwest.

Verizon is the biggest and strongest of the regional Bell companies, Qwest the smallest and weakest -- burdened by $16.7 billion in long-term debt and so fragile that it may not be able to survive unless it finds a partner.

Qwest is willing to pay more than Verizon for MCI because it needs MCI more.

Qwest, of course, doesn't put it that way. Its executives argue that they can pay more because Qwest makes a better partner for MCI than Verizon, because they can fire more MCI employees than Verizon and because their deal is more likely to be approved by government regulators and approved quickly.

That last claim is challenged by Blair Levin, a Washington-watcher for Legg Mason Wood Walker Inc., the Baltimore investment company. Levin, a former chief of staff of the Federal Communications Commission, says either transaction could win regulatory approval. As for the timing, neither is likely to be cleared until after regulators make a decision on AT&T Corp.'s plan to merge with SBC Communications Inc., a bigger and more precedent-laden merger.

"It's probably going to be true that they are going to look at both deals together and when one [decision] comes out, the other will come out at the same time or shortly after," he said. Neither Verizon nor Qwest has gained much traction arguing that its offer is better from a regulatory standpoint, he added. "I don't think policy is going to tip the MCI decision one way or the other."

Levin approaches the merger from a regulatory and policy point of view, but analysis based on business fundamentals generally comes down on the side of Verizon. It is a financially stronger company with a stock market value of $96.28 billion compared with Qwest's market capitalization of $6.87 billion.

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