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NEW YORK (CNN/Money) – Dear Michael Capellas,
I know that some of your shareholders are ticked off that you decided to accept a $6.7 billion buyout offer from Verizon instead of selling MCI (Research) to Qwest, which is offering you close to $8 billion in cash and stock.
But you should stick with Verizon, even if Qwest (Research) raises its bid, as many think it will do.
Of course, you have to try for the best deal possible for shareholders, so there's nothing wrong with talking to Qwest right up until the March 17 deadline that Verizon has given you to review Qwest's offer...especially since it could compel Verizon (Research) to sweeten its bid.
But there's more to a successful merger than negotiating the right price.
Two wrongs don't make a right
People in the telecom business aren't exactly quaking in their boots at the thought of a Qwest-MCI partnership.
Qwest has $17 billion in debt even though its market value is just $7.1 billion. Its bonds are rated at junk status. The company has no major wireless business to speak of. It has been slow to launch Internet phone services. Plus, Qwest pays no dividend.
In a report titled "Qwest and MCI?? What a Disaster!!", Probe Financial Associates COO Allan Tumolillo wrote that the combination would "not produce a powerhouse" and added that "MCI gains little, other than finding a home."
And Albert Lin, a telecom analyst with American Technology Research, noted recently that many of MCI's customers are government agencies. And after the WorldCom accounting scandal, he thinks that not too many of these customers would be willing renew their contracts with MCI if it merged with another financially shaky company like Qwest.
Is the company's future something you want to risk just to appease short-term minded investors?
Verizon, on the other hand, co-owns the second largest, and, by many consumer accounts, best, wireless service. It already has a significant presence with corporate customers because of its strength in wireless and huge local footprint throughout most of the East Coast.
Verizon's debt load of $39 billion is far more manageable when you consider that its market value is $100 billion. And the company has a dividend yielding a healthy 4.5 percent. So Verizon isn't just a better fit. It's also a far more stable company.
What about employees?
And don't forget your employees, Mike.
It's telling that Qwest has said it would cut as many as 15,000 jobs if it bought you, more than twice the 7,000 layoffs that Verizon said it would need to make. Sure, Wall Street, in its cold, number-driven manner, may see Qwest's plan as a better alternative since it speaks to streamlined costs and greater operating efficiencies.
But isn't it true that Qwest needs to cut more jobs to boost any chance of making a deal profitable? After all, Qwest is already expected to lose money in 2005 and 2006 without you.
Many analysts think that, for Qwest, a purchase of MCI is a last-gasp move of desperation to keep the company relevant in the rapidly changing telecom landscape. If Qwest fails, MCI's own future is in serious jeopardy.
For Verizon, adding MCI is just a smart strategic move. So if you sell out to Verizon, it seems safe to say that your tenure as the head of MCI will be looked back upon fondly. You've steered the company out of bankruptcy, made tough decisions to cut costs and got MCI in shape to sell out to the preeminent telecom provider.
Considering the nightmare that was created by Bernie Ebbers (GUILTY!) and Scott Sullivan, that's a good legacy to have. So after all that you've done, don't you owe it to MCI to make the move that ensures that it won't fade away?
Thanks for your time.
Sincerely yours,
Paul R. La Monica
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