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NEW YORK (CNN/Money) -
MCI agreed Tuesday to be acquired by Verizon after the Baby Bell raised its bid for the long-distance company nearly 13 percent, though the price remains below a rival bid from Qwest.
MCI, which had agreed to sell to Verizon for about $6.75 billion in February, received a higher offer from rival long-distance company Qwest (Research), which bid almost $8.5 billion in cash and stock and Monday gave MCI a deadline of April 5.
In a statement Tuesday morning, MCI said Verizon had raised the cash portion of its bid from $6 to $8.75 a share, including the recent payment of MCI's dividend to shareholders, in a new offer that values MCI at $7.6 billion, or $23.50 a share.
"We believe Verizon's substantial increase in its offer, the strength of its competitive position and the financial certainty at close make this offer compelling to our shareholders, customers and employees," MCI Chairman Nicholas deB. Katzenbach said in the statement.
Several large shareholders of MCI, including Mexican billionaire Carlos Slim, had pressured MCI to accept Qwest's richer offer. But many analysts thought that MCI would be better off aligning itself with Verizon since it is in much better financial shape than Qwest, which is saddled with more than $17 billion in debt.
"MCI ultimately wanted to cast its lot with a stronger company and clearly Verizon is the stronger company. Verizon was forced to raise its bid by Qwest but we always felt Verizon was in the driver's seat," said David Burks, an analyst with Hilliard Lyons, a brokerage based in Louisville, Ky.
MCI (Research) stock jumped nearly 4 percent on Nasdaq Tuesday morning after being halted for about an hour. Shares of Verizon (Research), which were also halted briefly, rose about 2 percent while Qwest stock sank 2 percent in New York Stock Exchange trading.
Qwest put out a statement that seemed to indicate it was not willing to concede defeat just yet, meaning it may seek to raise its bid yet again.
"We respect the right of Verizon to change the composition and value of their bid, but we still believe our proposal creates superior value for shareowners," Qwest said in a statement. "We are going to assess the situation and determine what is in the best interests of shareowners, customers and employees."
But Drake Johnstone, an analyst with Davenport & Co., a brokerage in Richmond, Va., said Qwest might have to throw in the towel since MCI has clearly shown that it was not willing to simply accept the offer with the highest price tag attached to it.
"Qwest has to realize that whatever price they go to with their bid, Verizon could undercut them and still win the deal," said Johnstone.
The battle for MCI is the latest example of consolidation in the rapidly changing telecom sector. Earlier this year, Baby Bell SBC Communications agreed to buy its former parent, AT&T. And last year, wireless giants Sprint and Nextel decided to merge.
Johnstone said the SBC-AT&T merger in particular made it a smart move for Verizon to go after MCI. Although both AT&T and MCI have seen serious declines in their consumer long-distance business, they each have an enviable list of large corporate clients, often referred to as enterprise customers, that Verizon can sell wireline, wireless and data services to.
"SBC-AT&T will be a formidable competitor so it made sense for Verizon to raise its offer to win MCI. This accelerates Verizon's process of providing a complete telecom offering to enterprise customers," Johnstone said.
Telecom companies are also bulking up in order to compete more effectively with cable firms like Comcast, which have begun offering their own telephone services, as well as with independent Internet telephone firms like Vonage.
MCI, formerly known as WorldCom, emerged from bankruptcy protection in April 2004 after an accounting scandal that caused billions of dollars in shareholder losses and tens of thousands of job cuts at the company.
Former WorldCom CEO Bernie Ebbers was found guilty of fraud and conspiracy charges related to the scandal earlier this month.
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Hilliard Lyons' Burks owns shares of Verizon but his firm has no investment banking relationships with it or other companies mentioned. Davenport's Johnstone does not own shares of any of the companies mentioned and his firm has no investment banking ties with the companies.
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