Why Qwest Can't Take No For An Answer

MCI's board has chosen Verizon for the second time, but the fight isn't over yet

Richard C. Notebaert decided to put his foot down. The feisty chairman of Qwest Communications International Inc. (Q ) had been trying for more than a month to get MCI Inc.'s (MCIP ) board to accept his offer for their company. So on Mar. 28, he sent MCI a letter saying that Qwest would drop its bid if he didn't hear back from the company in a week. He got his answer the very next day: MCI accepted a revised $7.6 billion proposal from Verizon Communications Inc. (VZ ) -- $800 million below Notebaert's last offer.

It may seem like the ultimate corporate rebuff, and it has left the 57-year-old telecom veteran considering his dwindling options. But it's a rejection Notebaert can't afford to accept, given how much Qwest needs MCI to improve its competitive and financial position.

So Notebaert will likely raise his bid once again. And this time, all indications are that Notebaert will bypass the board and take his case directly to MCI shareholders. He has hired New York City-based proxy solicitation firm the Altman Group to tally up where MCI shareholders stand. And some are already giving Notebaert the thumbs-up. "If the MCI board is not cooperating with Qwest, then they should go to the owners," says Bruce R. Berkowitz, president of investment managers Fairholme Capital Management LLC and MCI's third-largest shareholder with a 3.5% stake.

Good thing for Notebaert that he has some powerful investors on his side. Clearly, the MCI board wishes he would just go away. In an official statement, MCI's board said it again accepted the rival lesser offer because of Verizon's larger size, wireless capabilities, the strength of its capital structure, and its ongoing ability to invest in MCI's network. Stuck with $17 billion in debt and a share price that would barely buy a latte at Starbucks, Qwest seems like a riskier bet for an MCI board still stung by the scandals and bankruptcy of the former WorldCom Inc.


Winning over investors will clearly require a substantially higher offer, perhaps to as high as $29 per share, from Notebaert's current offer of $26. That would add another $1 billion to the price tag. The added cash will be key to Qwest's long shot bid to keep its chances alive: Some MCI shareholders are saying publicly that Verizon's offer, at about 10% less than the Qwest bid, is close enough to win their support.

To gain advantage in his fight, Notebaert is also likely to step up lobbying Congress and officials at the Federal Communications Commission. For weeks, Notebaert has been arguing that a combination of Verizon and MCI, coupled with the already announced merger of AT&T Corp. and SBC Communications Inc., would give those two Goliaths a stranglehold on business customers. That tactic, though, is unlikely to get him very far. Washington insiders say that at best he'll win divestitures of some MCI equipment. "It's likely Qwest will haunt a Verizon-MCI deal through the regulatory and antitrust review process, but they have little chance of blocking it," says Scott C. Cleland, regulatory analyst at the Precursor Group research firm in Washington.

That's why Notebaert's best shot for success is to launch an all-out shareholder battle in combination with a higher bid. So what would that fight look like? He could propose new board members at MCI's annual meeting in May, a long shot at this late date. Or Qwest could launch a tender offer for MCI shares, but that would trigger anti-takeover initiatives that would still give MCI's board final say. So Notebaert's best chance may simply be to lobby MCI shareholders to vote against the Verizon merger. It's hardly a sure thing, but with his options dwindling, it may be all Notebaert has left.

By Christopher Palmeri in Los Angeles and Brian Grow in Atlanta, with Catherine Yang in Washington

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