Some major MCI Inc. shareholders, dissatisfied with the stock price they'll receive in a proposed merger with Verizon Communications Inc., yesterday waged a silent protest against company board members by refusing to endorse their reappointment.
The protest was largely symbolic: The dissident group controls about 28 percent of company stock, but the slate of directors was running unopposed and could not have been replaced at yesterday's annual shareholder meeting in Chantilly.
But their decision to withhold that stock from yesterday's voting nevertheless signaled continued discontent with MCI's merger plans. Such protests can influence company policy, even if only a minority of shareholders participate. That was the case last spring when 43 percent of Walt Disney Co. shareholders joined in a no-confidence vote against former Walt Disney Co. chairman and chief executive Michael D. Eisner, who was then stripped of the chairmanship.
But as the Disney battle focused on the long-term management of the company, the fight at MCI is more focused on short-term concerns. MCI issued new shares when it emerged from bankruptcy last year, most of which went to bondholders and were quickly traded to investors betting the company would be sold.
Those investors are now hoping to get the highest price possible in a merger and have been scrutinizing the MCI board closely since directors began weighing competing merger offers from Verizon and Qwest Communications International Inc. in February. The board settled on a lower bid from Verizon, citing its greater financial strength. In objecting to that decision, the unhappy shareholders said they hope Denver-based Qwest could be persuaded to make another, higher offer for the company.
The MCI board "accepted the least of their alternatives," said Leon G. Cooperman, chairman of Omega Advisors Inc., who withheld voting of 10.1 million shares and did not attend the meeting. "[Almost] 80 million shares didn't vote for them," but there would be much more support for a Qwest offer, if that company were to attempt a hostile takeover, he said.
"We would have usually expected 90-something support for the directors, and with this one with nearly 30 percent withholding their votes, that's unusual," said Muir Paterson, director and co-head of mergers and acquisition research at Institutional Shareholder Services, a proxy research firm in Rockville. "Clearly this is a statement from a certain quarter of the shareholder group that they are not happy."
But with more than 200 million shares approving reelection of the nine directors, the significance of yesterday's protest is unclear. MCI officials interpreted the outcome positively, arguing that their planned merger with Verizon should easily win a majority when it is put before shareholders.
"It's clear now we're just moving forward," said MCI chief executive Michael D. Capellas in a press conference after the meeting at the Westfields Marriott. The company has already filed for approval of its $8.5 billion merger from the Federal Communications Commission, the Department of Justice, and all of the state regulatory commissions, he said. MCI will then schedule a shareholder vote to approve the merger sometime this summer, which will require at least 50.1 percent support, he said.
The shareholders who withheld their votes yesterday contended that if Qwest can be persuaded to increase its offer, the company might be successful in a hostile takeover. Qwest's most recent offer of $9.74 billion was withdrawn after Verizon increased its offer to $8.5 billion this month.
"Qwest should launch a hostile tender offer," said David Ahl, an adviser to four major investors. With 30 percent already siding with Qwest, the company could simply raise its offer to garner the necessary support to win the company, he said. Most of the shares are in the hands of arbitrageurs, he noted, "and they're just going to go with whoever has the most money."
Cooperman said he would either sell his MCI shares or vote in favor of the Verizon deal if Qwest does not come back with an offer.
Qwest spokeswoman Claire Mylott acknowledged the shareholders' sentiments, but she declined to comment on whether the company would renew its offer. "Today's vote demonstrates that a significant portion of MCI's shareholders are unhappy with the MCI management and board decision to not maximize shareowner value and accept a lower offer for MCI. That being said, we will continue to do what is in the best interest of our shareowners, customers and employees."
Speaking privately, sources familiar with Qwest's plan said the company has no plans to come back with a hostile offer for MCI.
Meanwhile, unless Qwest reenters the bidding war, ISS's Paterson said, it's unlikely that yesterday's shareholder grumbling will translate into a rejection of the Verizon deal. "It's very, very easy to shout out disagreement with an agreed transaction, but it takes a lot more confidence to vote against it when there's no alternative transaction."
