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February 25, 2005

We Put the "W" in Qwality

Well, you have to give them credit for trying, even if they can't get any other kind of credit.

Qwest has revised its offer, speeding the cash payout to MCI, and offering to make good any losses if Qwest stock drops before the deal is done. Moreover, consumer groups are claiming that the Verizon deal is anti-competitive.

Color me unimpressed.

The latest word is that MCI's board will stand by Verizon, even as it fulfills its fiduciary responsibility to play wastepaper basketball with each individual sheet of Qwest's new offer. Owning 5% of something is better than owning 40% of nothing The board has obviously made its decision, but the whole deal will still need to pass shareholder muster.

First, the consumer groups. Consumer groups take a notably static view of the world. Their cry of "anti-competitive" is only true if you assume that there are no other competing technologies. I can see why the Post would pick up the refrain to boost the hometown boys, especially given the jobs at stake, but with cable companies, satellite companies, VOIP, all out there, the idea that anyone's market position is unassailable or even particularly stable is short-sighted. The only thing they can do is to sow uncertainty in MCI shareholders that the Verizon deal would get regulatory approval.

As for the deal itself, it contains a "put," in effect, an offer to make good any losses if Qwest stock drops below $4.15 a share before the deal is sealed. Which is all well and good. Put options are frequently included in buyouts, to reassure the buyers that they're getting something worthwhile. (This reinforces my interpretation that Qwest is not so much acquiring MCI, as offering a minority stake of itself for sale.)

The problem is, all Qwest has to offer is more shares, i.e., a bigger piece of a smaller pie. It's a meaningless offer, and everyone knows it.

The wildcard remains the shareholders, who include a growing number of hedge funds moving in to make a quick profit on a hoped-for bidding war (paid subscription required). They're expecting Verizon to up its offer, and will be putting pressure on MCI's board to make them do so.

Two problems with this. First, the broader market isn't buying, with MCI stock down from its premium over Verizon's offer. It's still trading a little higher than Verizon would pay, but much lower than Qwest's offer. And they can't all get out at that price, either. Second, MCI released its quarterlies, showing yet another operating loss. This means that MCI lost money for both the 2nd and 4th quarters, and will be down for the year. The early efforts by interested investors to promote MCI as a cash cow rather than a cash hoard don't hold up to scrutiny.

If the shareholders, including the short-term hedge funds, were to stampede shareholders into rejecting Verizon's offer, they'll get what they deserve.

Posted by joshuasharf at February 25, 2005 10:54 AM | TrackBack

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