Wall Street: MCI's Choice Of Verizon Over Qwest A No-Brainer

Acquisition bids for MCI from both Verizon Communications and Qwest Communications were reportedly in motion last week. Monday morning, Verizon said it will acquire MCI, Ashburn, Va., for about $6.7 billion in equity and cash, according to New York-based Verizon.

The deal to buy MCI at what amounts to $20.75 a share is a bargain for Verizon, but MCI accepted the terms because it sees Verizon as a stronger company than Qwest, said Jay Arnold, portfolio manager at Abacus Asset Management.

"I think [Verizon] stole the company," said Arnold of the MCI purchase. "It's a great deal for Verizon. The shareholders of MCI didn't get a great deal, but maybe the combined companies will be more powerful and the returns will offset that."

Arnold said that even though Qwest outbid Verizon by about a billion dollars, MCI made the right move. The reasoning behind MCI's decision is that Qwest carries considerable debt and is somewhat of "a junk-rated Baby Bell," said Arnold.

"MCI felt a Qwest deal would be largely a stock deal and if Qwest shareholders didn't like the deal, they would sell shares, weakening the overall value," he said.

Allan Tumolillo, COO of Probe Financial Associates, said a decision to sell to Qwest would have been a mistake.

"MCI merging with Qwest would have been the end of the whole thing," said Tumolillo. "[MCI President and CEO Michael] Capellas is a smart guy. He may not know telecom all that well, but you look at Qwest and its $17 billion in debt, and you see they are struggling. MCI doesn't need to go into a mess like that. The only purpose for MCI to talk to Qwest was to provoke Verizon and Bell South to take a look at them more seriously."

Without MCI, the future of Qwest is a major question mark, said Tumolillo. "I think Qwest is headed into oblivion," he said.

The Verizon/MCI deal comes on the heels of SBC Communications buying AT&T in a deal announced Jan. 31.

"We view the [MCI] transaction to be marginally positive for the telecom industry in general," said Buckingham Research Group analysts Qaisar Hasan and May Tang in a report. "Alongside the SBC-AT&T transaction, Verizon's acquisition of MCI could bring much-needed pricing stability into the long-distance market, helping all participants in the space."