Verizon sweeps up MCI in $6.7 billion deal

Verizon has agreed to buy MCI in a deal valued at $6.7 billion.

Verizon Communications has agreed to acquire MCI in a deal valued at US$6.7 billion, the companies announced Monday, ending weeks of speculation about a likely deal.

Verizon said the acquisition would accelerate its plans to become a significant player in the enterprise services market, giving it a broader reach globally, a suite of advanced Internet Protocol-based services and a large base of business and government customers.

"From a customer perspective, the overwhelming theme is that customers want to have simplified delivery, one-stop shopping and a single point of contact," said Michael Capellas, president and chief executive officer at MCI. "(The deal) increases customer confidence in everything we do. At the end of the day, there's no question, our future is brighter together."

Getting regulatory approval for the deal is likely to take as much as a year, the companies said. Verizon must also win the approval of MCI's shareholders. The boards of directors at both companies have approved the agreement, they said in a statement. The U.S. Department of Justice, the U.S. Federal Communications Commission and several state public utilities commissions must also approve the deal.

Verizon will pay US$4.8 billion in shares and US$488 million in cash to buy MCI. MCI, meanwhile, will pay its shareowners quarterly and special dividends of US$4.50 per share, worth US$1.46 billion, bringing the total value of the deal to US$6.7 billion, the companies said.

Ivan Seidenberg, Verizon's chairman and chief executive officer (CEO), called the deal "a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies." The deal will make Verizon the second largest telecom carrier, behind the merged SBC/AT&T, and will allow the combined company to offer products that are "much more compelling in the marketplace," Seidenberg said during a conference call Monday.

The companies will figure out their branding strategy, organizational structure and other details closer to the completion of the deal, they said. Verizon will take on MCI's net debt when the deal closes, projected to be about US$4 billion.

The two companies plan to lay off about 7,000 employees because of the deal, including IT workers, engineers, sales staff and corporate support staff, officials said. Verizon anticipates savings of US$500 million in the first year of the deal, and US$1 billion a year in the third year and later. Savings will come from job cuts, an IT overhaul at MCI and real estate consolidation, said Doreen Toben, chief financial officer at Verizon.

Officials from both companies said the marriage makes sense by combining Verizon, traditionally a regional local phone service carrier, with MCI, which has focused recently on enterprise and government customers, as well as global IP-based (Internet Protocol-based) services. With an MCI IP backbone that reaches across the U.S. and into more than 140 other countries, Verizon will save about US$100 million a year on long-distance carrier charges, Toben said.

The deal comes two weeks after SBC Communications said it plans to acquire AT&T in a deal worth US$16 billion, and is likely to spark a guessing game among industry insiders over possible additional merger deals.

Qwest Communications International, which had been trying to broker its own deal with MCI, now finds itself on its own, and analysts last week speculated over plans that BellSouth and Sprint might have plans for a deal with a competitor or with each other.

Although the SBC/AT&T deal sparked speculation of new mergers in the telecom industry, Verizon and MCI have been discussing a deal since about the third quarter of 2004, Seidenberg said.

Neither MCI nor Verizon is new to the world of mergers.

Verizon itself was formed through a US$53 billion merger, completed in June 2000, between Bell Atlantic and GTE, both of which were created after the government-ordered breakup of the old AT&T in 1984. WorldCom merged with the original MCI Communications in September 1998 in a US$37 billion deal that, at the time, was the largest corporate merger in U.S. history. The deal created MCI WorldCom.

Verizon went on to riches and in 2004 had US$67.8 billion in annual revenue, making it the world's largest telecom company. Verizon, which started as a local phone service carrier, has focused in recent months on enterprise telecom services and on delivering fiber-to-the-premises service to some customers. Verizon's fiber deployment will allow it to offer television services that compete with cable TV.

MCI WorldCom's fate would be very different. A massive accounting scandal enveloped the company after an internal audit in June 2002 uncovered US$3.8 billion in accounting errors. In July 2002, WorldCom declared bankruptcy, and the accounting misstatements eventually reached a total of US$11 billion. In March 2004, a month before the newly renamed MCI emerged from bankruptcy, the company issued a report reducing pretax income for 2000 and 2001 by US$74.4 billion.

Before the company declared bankruptcy, WorldCom CEO Bernard Ebbers resigned in April 2002, amid questions about more than US$360 million in personal loans he received from the company. In March 2004, Ebbers was charged in federal court in New York with conspiracy and securities fraud. Scott D. Sullivan, WorldCom's former chief financial officer, pleaded guilty and agreed to cooperate with prosecutors.

Ebbers' trial began in the U.S. District Court for the Southern District of New York in January 2005.

After emerging from bankruptcy, MCI reported a US$3.4 billion loss in the third quarter of 2004. On Monday, MCI reported fourth-quarter revenue of US$5 billion, down 10 percent from the fourth quarter of 2003.

MCI's operating income before depreciation and amortization was US$775 million, but the operating income included incidental items of US$270 million.

Trading in shares in both companies has been volatile during recent weeks as investors adjusted their portfolios to take into account the expected acquisition. The value of MCI (ticker symbol MCIP) shares declined in early Monday morning trading, by US$1.33, to US$19.42, while Verizon (VZ) shares moved up by US$0.69 to US$37.00.

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