Future of Qwest Unclear Following Losing Bid for MCI

By Vandana Sinha
May 10, 2005 01:59 PM

Qwest may have ended its formal quest to beat Verizon in a bidding war for MCI. But the story is just beginning on what that means for the Denver-based losing bidder.

 

After getting its latest rejection letter from MCI in an auction battle that lasted almost three months, Qwest finally backed off its $9.85 billion bid last week.

 

In an earnings conference call a day later, Qwest Chairman and CEO Richard C. Notebaert looked on the sunny side. "A beautiful day here in Denver," he said according to a recent BusinessWeek story. "You can see the mountains. It is clear."

 

But one thing is not as clear as the Denver sky: Qwest's future. Business reporters spent the last several days trying to assess it after MCI accepted Verizon's lower $8.54 billion offer.

 

"It's difficult to assess the impact of Qwest's bid, but one measure is to look at the stock price," says Jeff Smith, the reporter who covers Qwest for The Rocky Mountain News.

 

He says immediately after Qwest submitted its first bid in early February, their share price rose 65 cents, from $4.20 to $4.85.

 

"But by last Friday, Qwest shares had declined to $3.42, suggesting investors believed Qwest was overbidding for MCI," he says. "Or (they) believed that most of the merger benefits would be going to MCI stockholders in terms of the cash upfront, rather than Qwest stockholders in terms of post-merger cost savings by combining the two companies."

 

Those same investors rallied behind Qwest's decision to pull out, as the company's stock price switched skyward after that by 20 cents, ending last Thursday at $3.62. That, Smith says, may signify a huge sigh of relief at MCI's refusal.

 

But investors may be the only pleased parties. The losing bid represents a "deep disappointment to Qwest, which had hoped to strengthen its balance sheet and become a national communications player by merging with MCI," Smith wrote. "The combined company's headquarters would have been in Denver, a shot in the arm to Colorado's economy."

 

Its companion piece in the Rocky Mountain News joined the consensus in several other business stories that Qwest now has a rocky road ahead. Its $17 billion in debt and $180 million in losses in the first quarter don't bode well for a telecom player that's also losing customers and market share to swelling competitors.

 

Many business reporters turned to industry analysts to forecast where Qwest could be headed alone. In a Wall Street Journal story, reporter Jesse Drucker confirmed those assessments with Notebaert himself.

 

"Qwest still has a few options," Drucker wrote. "The one it immediately discussed: buy the scattered local and long-distance assets that SBC and Verizon will probably be forced to sell off as a condition for regulatory approval of their deals. Sprint, which is also buying Nextel Communications Inc., has said it will spin off its local telephone business.

 

"'As these behemoths go through the regulatory processes ... they'll have to divest some customer lists, and I think that's opportunity,'" Drucker quotes Notebaert as saying. "He added that Qwest can "absolutely" continue on its own."

 

Smith is reserving his judgment. "It may be too early to know whether the publicity of the last three months will hurt or help the company going forward," he says.

 

And there's also the possibility that Qwest still isn't quitting. The Denver Post reported that Notebaert would "consider getting back in the fight for MCI if shareholders launched an effort to replace the MCI board."

 

According to some reports, Qwest is already in talks with MCI shareholders to push them in that direction.

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