NEW YORK (CNN/Money) -
Verizon Communications agreed Monday to buy MCI in a cash, stock and special dividend deal worth nearly $6.75 billion that could result in as many as 7,000 job cuts.
The deal comes two weeks after another Baby Bell, SBC Communications (Research), agreed to pay $16 billion in cash and stock for AT&T (Research). Like that deal, it was MCI's stable of business customers and its Internet and data business, more than its traditional consumer long-distance service, that prompted the deal.
Verizon (Research), the nation's largest phone company, will pay stock valued at $4.8 billion as well as $488 million in cash. In addition, MCI (Research) will give its shareholders a special dividend of $4.50 a share, which is worth $1.46 billion.
The companies expect cost savings of $1 billion a year by the third year after the deal, and have targeted staff cuts of 7,000 employees. The dilution of Verizon shares caused by the deal means Verizon expects its earnings per share will be lower due to the deal for the first two years after its close, and only breakeven in the third year.
The companies said the deal will take about a year to win necessary regulatory approval.
Besides its local and long distance service, Verizon owns 55 percent of Verizon Wireless in a joint venture with European telecom Vodafone Group (Research). Some of the analysts questioned the Verizon deal for the less lucrative parts of the telecom industry.
"We still don't like this deal for Verizon for similar reasons that we didn't like the AT&T deal for SBC: lower margins, declining revenue growth, less wireless exposure," said Greg Gorbatenko, media analyst for Marquis Investment Research. But he said the price that Verizon is paying is better than the price SBC paid for AT&T.
But other analysts said that Verizon needed to respond to SBC's bid for AT&T to allow it to be competitive going after large business customers.
"Strategically it brings a lot of benefits, more from the assets and the enterprise customer base that's important than from the long distance business," said Thomas Watts, telecom analyst of SG Cowen. "Some shareholders would have rather seen a Sprint deal, but this is easier from a regulatory standpoint. There's no wireless component, and the Department of Justice will consider this in parallel with the SBC-AT&T deal."
Verizon beats higher Qwest bid
Verizon's bid beat out what was reported to be a higher $7.3 billion offer from Qwest Communications (Research), another Baby Bell. But Watts said he's not surprised Verizon won out given the stronger financial position of the company. Qwest's debt is rated at junk bond status.
"The Verizon stock is a much stronger stock at this point," he said. "The MCI board must have felt a combination with Verizon will create a much stronger company than would a deal with Qwest."
During a conference call with analysts, Seidenberg said he was not concerned that Qwest or any other company would come back with a higher offer for MCI.
MCI's board met Sunday evening from 8 to 9 p.m. ET to consider Verizon's offer versus the competing offer from Qwest, according to Verizon spokesman Eric Rabe. He said that, at 9 p.m., MCI CEO Michael Capellas called Verizon's CEO Ivan Seidenberg to congratulate him.
Seidenberg then called a teleconference meeting of his board to let members know that MCI had accepted their bid. The Verizon board met from 9 to 10:30 p.m. to finalize details and craft the press release, with the deal being finalized at 10:30 p.m.
The deal brings MCI shareholders $20.75 in cash, Verizon stock and dividend payments for each of their shares, based on Friday's closing price. That matches the closing price of MCI shares on Friday. But shares of MCI are up 12 percent over the last three weeks, since talk of the telecom mergers started driving its shares higher.
"The acquisition will significantly enhance our customer service and competitive positioning by giving us a global reach, a suite of IP-based and value-added services, and a powerful, broad base of large-business and government customers," said a statement Seidenberg.
Rebound from bankruptcy
MCI, then known as WorldCom, filed the nation's largest bankruptcy case in July 2002. It emerged from bankruptcy last April, despite objections of some competitors who questioned whether the company used proceedings to benefit from the accounting fraud that caused the bankruptcy.
The former CEO of WorldCom, Bernard Ebbers, is on trial this month on federal charges of securities fraud.
The main witness against Ebbers is the former WorldCom Chief Financial Officer Scott Sullivan, who faces cross examination by Ebbers' attorney this week. Last week Sullivan testified a possible 2001 merger between WorldCom and Verizon was scuttled by internal concerns at WorldCom over the questionable accounting practices there.
Capellas, the former CEO of Compaq Computer, has led MCI since November 2002. He joined the company after he negotiated the sale of Compaq to Hewlett Packard (Research).
The HP-Compaq deal has not worked out well for the computer maker, and last week the HP board dismissed Chairman and CEO Carly Fiorina. Capellas has been mentioned as a possible successor for Fiorina at the computer company.
During the conference call, Seidenberg said that Verizon and MCI had yet to decide what role Capellas or other MCI executives would play, if any, at Verizon. And if Capellas were to leave MCI following the merger, he stands to gain handsomely.
According to the terms of his employment contract, disclosed in the company's latest annual filing with the SEC, Capellas would receive at least $4.5 million, or three times the sum of his base salary of $1.5 million, if he leaves for "good reason." He also is eligible to receive three times his bonus, which could amount to another $4.5 million.
In addition, Capellas received restricted stock worth $12 million at the time he was hired, which vests over a three year period, and another grant of restricted stock worth $6 million when the company emerged from bankruptcy last year.