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Verizon buys national standing

The regional phone giant acquires MCI to jump-start efforts to become a national provider for large companies.

NEW YORK - Verizon Communications Inc.'s $6.75-billion takeover of long-distance provider MCI Inc. is the latest example of how regulatory changes in Washington are continuing to transform the telephone industry.

A court ruling nearly a year ago and subsequent decisions by the Federal Communications Commission were key catalysts for Monday's deal as well as last month's $16-billion takeover of AT&T Corp. by SBC Communications Inc. Those findings effectively forced long-distance providers on the auction block by boosting their operating costs, compounding a multiyear slide in customers and revenues.

While consumer advocates expressed worry, it's not clear the loss of AT&T and MCI as rivals will free their buyers to boost prices for long-distance phone calls. That's because many consumers and businesses are taking advantage of money-saving alternatives, especially cell phones and Internet-based phone services from cable TV companies and others.

"If you're willing to change the way you purchase services, there's a lot of competition out there" beyond the local Bells, said David Willis, an industry analyst for the Meta Group Inc. in Stamford, Conn., who noted that AT&T and MCI had stopped competing for new residential customers.

The recent spate of telecom mergers, including December's deal by Sprint Corp. to acquire Nextel Communications Inc. for $35-billion, will reduce the industry to four dominant telephone companies: Verizon, SBC, BellSouth Corp. and Sprint Nextel. It also leaves Qwest Communications International Inc., a Baby Bell whose higher stock-based bid was rejected by MCI, isolated in a highly competitive market.

Verizon, the country's largest regional phone company, declined to say what will become of the MCI brand. It is a storied name in part because of its role as the first major rival to AT&T's national long-distance monopoly, and then as a legal opponent in the case which led U.S. Judge Harold Greene to order the breakup of the Bell system in 1984.

MCI was acquired in 1998 by Bernard Ebbers' WorldCom Inc., which re-emerged as MCI in 2003 after a financial scandal and bankruptcy court reorganization.

Monday's transaction marks the second major sale of a company by Michael Capellas, MCI's president and chief executive. He was the head of Compaq Computer Corp. when it was taken over by Hewlett-Packard Co. in 2002, a troubled merger that just last week helped cost HP chief executive Carly Fiorina her job.

For SBC and Verizon, the consumer business is a minor attraction in their purchases. Instead, they are counting on the corporate customers and national network operations that AT&T and MCI bring.

The merger would jump-start Verizon's efforts to become a national service provider for large companies thanks to MCI's base of 1-million business customers and an extensive fiber optic network and local infrastructure outside of Verizon's largely Northeastern power base.

Such attributes were an even bigger lure for SBC in acquiring AT&T, which has three times as many business customers and provides substantial network assets and operations beyond SBC's strongholds in the Southwest, the Midwest and California.

AT&T and MCI also bring a big base of residential customers to whom SBC and Verizon would like to market cable TV services they plan to begin providing over their phone lines this year. SBC and Verizon are investing billions to upgrade their networks to deliver video and interactive services.

The Verizon-MCI deal, expected to take one year to gain government approvals, will result in about 7,000 job cuts from the companies' combined work force of about 250,000 employees, executives said.

Capellas and the MCI board accepted Verizon's bid even though it was about $500-million below what Qwest offered. Verizon, a top cellular player, likely won MCI's favor because it is larger and in better financial shape than Qwest.

MCI investors were said to have reacted poorly to the prospect of being paid with shares of stock in Qwest, the local phone carrier for much of the sparsely populated Rocky Mountains and Pacific Northwest that has been marred by accounting scandals.

The deal values MCI's stock at $6.75-billion, or $20.75 per share, equal to Friday's closing price on the Nasdaq Stock Market. But after rising 12 percent in two weeks amid speculation fueled by the SBC-AT&T deal, MCI's shares fell 85 cents, or 4 percent, to $19.90 in Monday afternoon trading on the Nasdaq.

Verizon shares fell 13 cents to $36.18 on the New York Stock Exchange. Qwest shares fell 17 cents, or 4 percent, to $3.98.

Under the agreement, Verizon will pay $4.8-billion worth of its stock and $488-million in cash for MCI's shares. In addition, MCI shareholders will be paid dividends worth $1.46-billion.

Verizon is also assuming MCI's debt, expected to total $4-billion at closing. The companies estimated that merger transition expenses will total up to $3.5-billion over three years once the deal closes, but that cost-cutting from redundant operations will yield about $1-billion per year in savings starting in the third year.

TELECOM MERGERS

Recent telecommunications mergers:

SBC-AT&T

THE DEAL: SBC Communications Inc. agrees to acquire former parent AT&T Corp. in a $16-billion deal, mostly in stock, that would create one of the world's largest telecom companies.

WHEN: Announced Jan. 31; expected to close in more than a year.

JOB CUTS: 13,000, on top of existing plans at the companies to eliminate at least 12,000.

ALLTEL-WESTERN WIRELESS

THE DEAL: Alltel Corp., the sixth-biggest U.S. cellular carrier, agreed to buy Western Wireless Corp., a Northwest regional carrier that owns the Cellular One brand, for about $4.4-billion in cash and stock.

WHEN: Announced Jan. 10; closing by mid 2005.

JOB CUTS: Less than 10 percent of Western Wireless' 4,000 workers expected to be laid off.

SPRINT-NEXTEL

THE DEAL: Sprint Corp. agrees to acquire Nextel Communications Inc. in a $35-billion deal, mostly in stock, combining the nation's third- and fifth-largest cell phone carriers.

WHEN: Announced Dec. 15; closing in the second half of this year.

JOB CUTS: Details not announced.

CINGULAR-AT&T WIRELESS

THE DEAL: Cingular Wireless LLC acquired AT&T Wireless Services Inc. for $41-billion in cash to form the nation's largest cell phone company.

WHEN: Announced in February 2004 and completed Oct. 26.

JOB CUTS: About 10 percent of Cingular's 68,000 jobs.

[Last modified February 15, 2005, 01:16:18]