Qwest Communications International Inc. has given MCI Inc. one week to decide whether it will accept its $8.45 billion takeover bid, after which Qwest would withdraw the offer, the company said yesterday.
MCI's board continued to discuss Qwest's offer yesterday, following meetings last week and over the weekend.
Yesterday's move setting an April 5 deadline was the first time Qwest issued an ultimatum in the tug of war between Verizon Communications Inc. and Qwest over MCI of Ashburn, which used to do business as WorldCom Inc.
Last month, MCI accepted Verizon's takeover bid of $6.75 billion, citing Verizon's greater financial strength and better strategic fit. But since Qwest sweetened its offer with more cash, MCI's board has been reconsidering Qwest's bid.
Qwest has actively lobbied MCI's shareholders to pressure the company's board to reconsider its decision. This month, Qwest increased its bid by nearly half a billion dollars, and yesterday it said its lenders agreed to commit an additional $500 million in financing. Those assurances were secured over Easter weekend at the behest of MCI's board, Qwest's chief executive said in a letter.
"We are confident that you will find it a superior proposal within the meaning of your agreement with Verizon and we request that you take the steps necessary under that agreement to enable you to execute our merger agreement," Richard C. Notebaert wrote in a letter dated yesterday to MCI Chairman Nicholas deB. Katzenbach.
MCI spokesman Peter Lucht said the board received the letter, but he declined to comment on the board's negotiations.
Verizon spokesman Eric Rabe said its offer is still better for long-term shareholders and MCI employees. "We still think we have a superior offer out there."
If MCI's board accepts Qwest's offer, Verizon has five days to counter it. And if Verizon backs down, MCI and Qwest will have to pay a $200 million breakup fee to Verizon for severing the merger agreement.
Analysts say a merger with Qwest would be a concession to the short-term interests of MCI's shareholders, many of whom are hedge funds trying to maximize the amount of cash reaped from a sale.
"The people agitating for Qwest-MCI are purely looking for short-term gains and clearly don't care that the combined company is disastrous in the long term," said F. Drake Johnstone, an analyst with Davenport & Co. in Richmond.
Qwest, based in Denver, is a relatively young company that rode the Internet boom of the late 1990s and in 2000 merged with US West Inc., a regional local phone company that operates in 14 mostly Western states.
Since then, Qwest suffered twin blows with the technology market's crash and an accounting scandal that this month resulted in the Securities and Exchange Commission charging seven former executives with fraud. Qwest narrowly escaped bankruptcy, and although it reduced its debt, it still carries more than $17 billion in debt. Notebaert has repeatedly said that its financial weakness would not be a problem and that a combined Qwest and MCI would allow the companies to cut nearly $15 billion in costs and as many as 15,000 jobs.
On the other hand, MCI-Qwest would not have as broad an array of telecommunications services as Verizon, which sells wireless phone service through a subsidiary. Verizon is also investing billions of dollars to rebuild a high-speed network to carry video traffic, an investment Qwest cannot afford.
Verizon could simply outspend a combined Qwest-MCI to build its own network, analysts said. With a $96.2 billion market value, compared with Qwest's $6.8 billion, Verizon has more ability to raise capital to challenge other mega-companies, such as SBC Communications Inc. and AT&T Corp., which plan to merge, analysts said.