Despite Qwest's official withdrawal from the battle for MCI, some hedge fund managers continue to urge the company to press its bid in advance of a shareholder vote on the deal this summer. Some would like to see Qwest take its offer directly to shareholders in a hostile takeover attempt.
The stakes for the hedge funds are very high. Four out of MCI's top six shareholders are hedge funds that collectively own about 43 million shares, or about 13 percent of the company.
Based on the current offers, these four hedge funds stand to take in about $172 million less collectively if MCI accepts Verizon's bid. And it is not just hedge funds with big money at stake.
The bidding war has also placed Baltimore investment management firm Legg Mason Inc. in an unusually activist role. The firm's legendary mutual fund manager, William H. Miller III, has made big bets on both MCI and Qwest stock and has loudly argued that Qwest's bid is superior.
Legg Mason owns about 5.6 million MCI shares, which would be worth about $168 million under Qwest's offer and $146 million under Verizon's. The firm owns about 250 million Qwest shares, a stake currently worth about $900 million. If Qwest fails to acquire MCI, the value of that stake could decline. Through a spokesman, Miller declined to comment on his role in the MCI bidding.
Hedge funds have occasionally stepped into the spotlight on big merger deals. In February, for instance, Highfields Capital Management LP went public with a $3.25 billion cash bid for Richmond-based Circuit City Stores Inc. Circuit City's board rejected the offer. But the funds more commonly stay on the sidelines, quietly making bets on potential winners and losers in big transactions. Critics, including Verizon chief executive Ivan G. Seidenberg, have blasted the funds' role in the MCI deal, saying they are interested only in an immediate payout and don't care about the future of MCI or its long-term stock and bond holders.
In response, some hedge fund managers say they expect that Verizon will triumph and that, in the end, their influence will have gotten MCI investors more value for their shares as well the better long-term corporate partner.
"The real criticism I would put forward is to MCI's board for having accepted such a low price to begin with," said veteran hedge fund manager Peter Schoenfeld, whose firm owns about 324,000 MCI shares. In the end, Schoenfeld said, MCI appears likely to wind up with "the more prudent acquirer."
But things might have worked out differently. A person close to the situation, who spoke on condition of anonymity because the deal is not yet done, said Verizon considered walking away from the table at several points as hedge funds pushed MCI's price tag higher. "It's a dangerous game the hedge funds are playing," the source said. "Things did not have to work out they way they have."
