thinks getting snubbed repeatedly by
is a bitter pill to swallow, it soon may taste the real thing.
That's because MCI has a so-called poison pill that could make a hostile bid prohibitively expensive.
After Denver-based Qwest forced MCI to make a decision this week on its latest $27.50-a-share bid, the MCI board said it could do a deal at $30. Qwest turned the counterproposal down, and MCI promptly renewed its embrace of
. Some observers speculated that Qwest could have enough MCI shareholder support to pursue a hostile takeover bid.
But $30 soon might sound cheap if the West's wild Bell does go hostile. A hostile acquirer would have to offer at least $31.25 a share to neutralize MCI's pill -- a hefty price tag that stands to put even more pressure on debt-heavy Qwest.
Ashburn, Va.-based MCI late Tuesday stuck with Verizon's $7.5 billion cash-and-stock offer, rejecting Qwest's $9 billion bid, citing the company's financial risks. Verizon and its backers have noted Qwest's weak competitive position and heavy debt load, while Qwest has claimed it can offer greater synergies.
In an effort to offset the perceived risks, MCI asked for more built-in protections, such as a retention plan for key employees and a bump in the offer price, according to a person familiar with the company.
Qwest, whose financial firepower for this deal has been questioned more than once, chose to withdraw rather than up the ante. But now, three times rejected, Qwest could see its already strange takeover saga take a turn for the bizarre -- thanks to the antitakeover provision crafted a year ago by MCI.
The poison pill says rejected suitors that continue with a hostile merger plan can avoid triggering MCI's right to dilute them by offering at least $31.25 a share. The $31.25 figure is 25% above MCI's price when the stock started trading last year after the company emerged from bankruptcy. As a friendly buyer, Verizon isn't affected by the minimum-price provision.
After April 20, the $31.25 provision expires and is replaced by a requirement that an offer must be 25% higher than MCI's 10-day average share price. Using the last 10 days, that figure would be just over $30 today -- and, assuming MCI stock hangs around $25 or so for the next two weeks, it too figures to be about $31.25.
Qwest had no comment other than to say the company is looking at its options. An MCI representative declined to comment.
Observers say the next step is likely to be a proxy battle in which MCI shareholders are asked to take sides. The vote is expected to be influenced by a number of large investors who may be looking primarily for a rich exit from MCI's stock, which declined sharply last year before being resuscitated by MCI's efforts to find a suitor.
Blaylock & Partners analyst Rick Black estimates that between 60% and 70% of MCI's shareholders are hedge funds and arbitrage traders.
"Some of these people have been waiting for an opportunity to get out, and others, who bought later, smelled an opportunity," says Black. While they are all looking for the highest price, "that doesn't mean they aren't also looking at the long-term viability of the company," says Black, who has no rating on MCI and holds on Qwest and Verizon. Blaylock has no underwriting ties to these companies.
The problem Qwest finds itself in, says Black, is that it now faces an even more expensive proposition if it goes to shareholders and tries avoiding the poison pill by meeting the 25% premium requirement.
By overextending and taking on more debt to finance a higher price, says Black, "it takes away the argument by Qwest that the deal would help on deleveraging."