"There is no redeeming justification for this" merger, said Raul Katz, president and chief executive of Adventis Corp., a management consulting firm.
He said that leaking information about the talks could be part of an MCI strategy to solicit bids from potential partners such as Verizon or BellSouth. Both companies are in stronger financial shape than Qwest and have telecommunications empires that extend into technologies such as wireless and high-speed Internet access.
Sources say Qwest Communications is offering MCI about $6.4 billion in stock.
(Doug Mills -- AP)
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Still, some analysts said a Qwest-MCI deal could make sense as a marriage of two companies with limited options.
Qwest, which has a declining local and long-distance business, would benefit from MCI's corporate customers, which it could serve through its own, newer network, said Susan Kalla, an analyst with Friedman, Billings, Ramsey & Co. For Qwest, MCI also could be a source of cash.
"It's an audacious move, but it would clear up Qwest's terrible balance sheet," said Andrew D. Lipman, vice chairman and lead telecommunications lawyer at Swidler Berlin LLP in Washington. Qwest has $17 billion in debt and $1.8 billion in cash. It has not had cash to invest in upgrades such as fiber-optic cable for the home, as Verizon and SBC have started to do.
MCI, which has 41,000 employees, posted $27 billion in revenue and $22 billion in profit in 2003, and its finances were boosted by cancellation of its debt in bankruptcy. MCI now has $5.9 billion in debt and $5.6 billion in cash.
MCI made its name in the mid-1980s competing against AT&T in the consumer long-distance business, but its business today is built around selling phone and Internet service to large corporate clients.
Until last year, the company competed against regional phone companies such as Qwest and Verizon by leasing lines from those companies and reselling local service, but it has backed out of the retail consumer market and its international and long-distance businesses are in decline. Binding itself to a stronger regional telecommunications company with broader offerings would allow the company to survive, company sources said.
Since taking over in November 2002, MCI chief executive Michael D. Capellas's primary objective has been to clean up the company's accounting problems and then swiftly sell the firm, sources close to the company and on Wall Street said. The company started its most recent discussions with Qwest at the end of last year, said a source close to the companies.
MCI's bonds dropped yesterday.
"The market was disappointed that a sub-investment grade borrower came into the market to make a bid, and that caused [MCI's] bonds to trade down a bit," said John T. Fruit, a debt analyst at U.S. Bancorp Asset Management in Minneapolis.
