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

By Jerry Knight
Monday, March 28, 2005

As a long-time advocate for investors, it pains me to say it, but MCI Inc.'s board of directors ought to tell shareholders who oppose merging with Verizon Communications Inc. to take a hike.

It's true that Qwest Communications International Inc. is offering stockholders more money for MCI than Verizon -- $8.45 billion vs. $6.75 billion -- but merging with Qwest would be one of the dumbest deals in the history of Washington investing.

MCI already is co-champion in the D.C.'s Dumbest Deals competition.

Merging with Qwest could turn out to be an even bigger mistake than MCI's decision to sell out to WorldCom Inc., a blunder matched only by Time Warner Inc. selling itself to Dulles-based America Online Inc.

The same "take the money" mentality that produced those two disastrous mega-mergers is behind the support by many of MCI's biggest stockholders for combining with Qwest.

Unless the bids are raised -- and they may well be -- investors would get stock and cash worth $26 a share if MCI hooks up with Qwest and $20.75 if MCI goes with Verizon.

While the higher price might arguably be in the best interest of shareholders, this is one of the rare instances when the interest of the shareholders and the interest of the company are not the same. It's doubtful that a merger with Qwest would be in the best interest of MCI, its customers, its employees or the Washington region -- even if it is good for the shareholders.

There are shareholders and then there are shareholders.

The vast majority of the investors who own MCI stock are not individual investors. Nor are they the mutual funds, insurance companies or pension funds that make investments on behalf of ordinary Americans.

Most of those folks were wiped out by the bankruptcy reorganization that was necessary when the WorldCom/MCI merger was turned into a train wreck by accounting fraud, flawed business strategies and incompetent management. Those former shareholders are going to get a small part of their money back, thanks to a series of lawsuits (more about that later.)

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."

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