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Is That a Rebel Yell at MCI?

By Steve Rosenbush and Brian Grow The battle for control of telecom pioneer MCI, already among the most dramatic in recent memory, looks like it may escalate in even more spectacular fashion. For the second time in six weeks, MCI (MCIP) directors have spurned an offer from struggling Qwest (Q) in favor of a lower bid from Verizon (VZ).

Bigger and stronger, Verizon remains favored to win this fight. But Qwest, with its back against the wall and very little to lose, may muster the energy for one more round. "Qwest is likely to revise its offer and officially launch a hostile takeover for MCI," telecom analyst Blake Bath said in a Mar. 29 report.

Several analysts think Qwest is already preparing another salvo. Banc of America Securities telecom analyst David Barden said Qwest management indicated in a meeting Mar. 28 that it was "ready to go to the mat" by taking a new offer directly to MCI shareholders in a hostile bid that would circumvent MCI directors. He expects Qwest to up the ante from $26 a share to somewhere between $26.50 and $27.50 in this next round. That would be a significant premium on Verizon's offer, which it has raised to $23.10 from $20.75.

IMPOSSIBLE DREAM? What must Qwest do to have a chance of winning this fight? Dramatically boost its bid, shareholders say. Its ability to do that depends on whether its promise to achieve huge, post-merger cost cuts can be believed. Qwest estimates it can save $14.7 billion by acquiring MCI, more than twice the savings that Verizon claims it would gain from the deal.

While Verizon says Qwest's promises are overblown, some investors see them as achievable. John Paulson, chief executive of Paulson & Co. which also owns 3.5% of MCI, thinks the savings could be realized. Then "they could transfer more of those funds to MCI shareholders," he says.

The battle's outcome may be influenced by powerful external forces as well. As interest rates rise and the price of oil climbs, the investment environment could favor shares of more financially stable companies such as Verizon. That could help erase some of the difference between Verizon's and Qwest's bids.

TAKING SIDES. The latest Verizon offer, accepted by MCI on Mar. 29, includes stronger protections for MCI shareholders. The new cash component is $8.75 a share, or 46% higher than the cash component of its previous bid. Verizon also guarantees MCI shareholders a minimum of $14.75 in Verizon shares, protecting MCI shareholders in case the value of Verizon shares plummet.

It might be a week before Qwest surfaces with a new bid. But that week will be crucial, as Qwest attempts to rally the support of activist MCI shareholders who believe it should be sold to the highest bidder.

While MCI directors have determined that Qwest's estimates of cost savings from the deal are unrealistically high, some shareholders disagree. Several of MCI's largest investors, including Mexican billionaire Carlos Slim Helu, converted MCI bonds purchased while the company was in bankruptcy into large equity stakes. Qwest's ability to accurately assess high-risk deals is proven, these investors say, and MCI's board should accept the highest-priced bid. Others with a shorter horizon, such as hedge funds, might not necessarily care what happens to MCI months or years from now.

PROXY MUSIC. Several investors already have voiced dissatisfaction with the latest Verizon bid. And while they hardly constitute a working majority, their voices might represent a vanguard of stockholder sentiment.

Shareholders owning 26% of MCI stock, including four of the five largest investors, expressed unhappiness with the board's decision to accept a previous lower bid from Verizon. That block might hold together if Qwest steps up with a third revised offer. "I vote Qwest," says Bruce Berkowitz, chief executive of Fairholme Capital, an investment firm that owns a 3.5% stake in MCI. "The Qwest bid is higher."

He isn't the only MCI shareholder open to another overture. Paulson says it's too early for Qwest to launch a proxy battle. But if MCI's board rejects a new and higher Qwest bid, then all bets are off. Berkowitz, for one, says he would support a proxy fight if Qwest decides to pursue one. Says Berkowitz: "If the MCI board is not cooperating with Qwest, then they should go to the owners."

MCI executives just wish the whole affair was over. In the last few years, the outfit has endured the largest bankruptcy and accounting-fraud scandals in history. Bernie Ebbers, CEO when MCI did business as WorldCom, was found guilty of fraud and conspiracy in a federal trial earlier this month. Employees have been through a wrenching corporate overhaul. Now they long for a little stability. But, says an MCI executive, they also know that "the next 60 to 90 days will be hell." Rosenbush is a senior writer for BusinessWeek Online in New York

Grow is a corresponent in BusinessWeek's Atlanta bureau

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