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For MCI Board, An Awkward Straddle

Company's Advisers Must Consider More Than Price in Evaluating Offers

By Yuki Noguchi and David A. Vise
Washington Post Staff Writers
Friday, March 4, 2005; Page E01

At first blush, the choice for MCI Inc.'s board of directors might seem obvious. Verizon Communications Inc. offered $6.75 billion in cash and stock for the company. Qwest Communications International Inc. offered $1.25 billion more.

But as the board members evaluate the two offers, experts said they must navigate a thicket of issues that go beyond price, including the stability of the acquiring company, the strategic focus of a combined company, and the time to complete the regulatory approval process. The nature of MCI's stockholders, some of whom are short-term investors, could also affect the outcome.

Qwest Communications International's $8 billion offer for MCI isn't the slam-dunk over Verizon Communications' $6.75 billion bid that it might initially appear to be. (Charles Dharapak -- AP)

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"You have a whole bunch of variables," MCI Chairman Nicholas deB. Katzenbach said in an interview Wednesday. "Price is important, and what you try to do is to weigh [everything] as best you can. What's important is to try to take everything into consideration and come out of that with your best conclusion."

Legal experts said the MCI board has tremendous flexibility in choosing between the competing bids, provided it follows the traditional process of hiring outside financial and legal advisers to guide them and spends sufficient time deliberating. As long as the board follows these basic guidelines, it is unlikely to have its decision overturned in court, several legal experts said.

Moreover, since both bids are composed of cash and stock -- instead of just cash -- the board must make a judgment as to which proposal offers MCI stockholders the best deal. That analysis depends on how MCI's financial advisers and, ultimately, how the board members themselves value the offers, and the strength of the combined company, both in the short run and in the long run, experts said.

Last month, the board agreed to sell the company to Verizon, which angered Qwest's management and some of MCI's shareholders, who felt the higher price should have prevailed. New York-based Verizon and Ashburn-based MCI said their agreement represented the highest long-term value for MCI shareholders. Now, with Denver-based Qwest offering to sweeten its deal or pay part of the cash to MCI shareholders sooner, the evaluation of the competing offers has become more complicated.

MCI's board has until March 17 to review the new offer. After the board acts, MCI shareholders must vote.

In the meantime, Qwest's chief executive and some MCI shareholders have groused that Katzenbach and the board of directors gave the higher offer short shrift.

"[W]e question whether our recent proposal truly received an extensive review," Qwest chief executive Richard C. Notebaert wrote to Katzenbach and other members of MCI's board in a letter dated March 2. "We are also concerned that the process over the next two weeks will simply be process for process sake, as opposed to a meaningful evaluation of our offer." He reiterated his belief that the Qwest offer is "superior" to that of Verizon.

But when two companies bid using large amounts of stock, a board's decision comes down to more than just price. Also in the equation are Qwest's announced plans to fire as many as 15,000 employees of a combined company to save billions of dollars and Verizon's to lay off 7,000 employees following a merger.

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