MCI-Verizon: A Happy Ending, but for Whom?
EYE ON THE CARRIERS
In telecom’s version of “The Bachelorette,” at the 11th hour MCI spurned Qwest’s $8.45 billion proposal last week to go with a sweetened Verizon offer of $7.6 billion. The markets applauded: Verizon’s shares rose nearly 2% in the first hours of trading (rare for an acquiring company), while MCI traded to its annual highs. Pundits are beaming. All that’s missing is a wedding cake and triumphal march.
But hold on. Clearly, the Verizon bid is a better offer. But before breaking out the champagne, you might want to ask two critical questions.
The first is, “Better for whom?” Stakeholders in the deal include both customers and shareholders. And the deal affects them rather differently.
The second question is, “Better than what alternative?” Verizon and Qwest clearly believe MCI is worth roughly $8 billion.
That’s debatable. Given the lousy success rate of mergers in general (HP/Compaq, anyone? How about AT&T and NCR?), it’s possible that Verizon might have done better plowing that capital into its own network and services, while aggressively cherry-picking MCI’s customers. Qwest, on the other hand, was pretty much out of options: With declining revenue, ballooning debt and less than $2 billion in the bank, the company needed MCI’s revenue base as much as MCI needed its stability.
Meantime, there’s no debate that mergers bring upheaval, churn and customer dissatisfaction. Verizon says it will reduce costs by laying off 4,000 workers from the combined company. What happens to the customers they would have been serving while those about-to-be- fired employees polish their rsums? If history’s any judge, the answer isn’t pretty.
Which brings us to the first question: For who, exactly is this deal a happy ending?
Clearly, for MCI’s shareholders, the deal is great news. Verizon can do more for MCI than Qwest: It already has committed to plowing $3 billion of badly needed capital into MCI’s infrastructure, something Qwest couldn’t have hoped to accomplish.
For Verizon shareholders, the jury’s out. If the deal succeeds, it will have been a good thing. But we won’t know until we get there.
As for customers, here’s the big problem. The top U.S. telcos are SBC, Sprint, Verizon, AT&T and BellSouth, with MCI and Qwest arguably the struggling underdogs.
Guess what? This deal means the only strong player that’s not involved in a merger is BellSouth – which doesn’t have much of a national presence. That means that telecom managers looking to safeguard their services by issuing competitive RFPs have basically three options: SBC/AT&T, Sprint/Nextel and Verizon/MCI – nobody that’s not actively merging, and one fewer than if Verizon remained a standalone alternative.
Hate to tell you, guys, that’s not a good thing. When all your suppliers are in the throes of “merger hell,” service tends to go …well, you know where. So while everyone else is breaking out the champagne, telecom managers probably should stock up on the Pepto- Bismol.
Johnson is president and chief research officer at Nemertes Research, an independent technology research firm. She can be reached at johna@nemertes.com.
Copyright Network World Inc. Apr 4, 2005