Qwest Gives Up MCI Quest

It also takes a parting swipe at MCI's board as Verizon wins out.
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Qwest

(Q)

dropped out of the bidding war for

MCI

(MCIP)

Monday, saying it "is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest."

The decision amounts to a concession that

Verizon

(VZ) - Get Report

and MCI will be able to proceed on their agreed-upon merger, at terms that increased twice in the space of two months as a result of Qwest's efforts.

Qwest didn't go out quietly, saying, "Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value." Qwest added that "MCI's board of directors has surrendered control of the bidding process" by choosing Verizon's $26-a-share offer over Qwest's $30 bid.

Verizon and MCI agreed to merge in February, but the past two months have seen a furious back-and-forth volley between Qwest and Verizon. Qwest has repeatedly made offers that are numerically superior to Verizon's, but the MCI board has with one exception held steadfast to the principle that Verizon's financial and operational strength make it a much stronger partner.

The move came just a week after MCI said for the first time that it considered a Qwest offer superior to the one it had accepted for Verizon.

Last weekend, MCI embraced Qwest's $30-a-share offer as better than the one it had accepted from Verizon for $23 and change. At the time, Verizon said it would consider its options and threatened to walk away from the deal for a big cash breakup fee. The comments spurred discussion of whether Verizon might back away from the deal, and whether Qwest's decision to meet an MCI demand for $30 a share might leave MCI with no choice but to go with Qwest.

It has been clear throughout the bidding, which started in February, that MCI would prefer not to go with Qwest, in large part because the company has a weak business and a weaker financial situation.

In taking the $26 cash-and-stock offer from Verizon, MCI cited the risk that big customers would walk should it accept the Qwest bid.

"MCI's Board noted that a large number of MCI's most important business customers had indicated that they prefer a transaction between MCI and Verizon rather than a transaction between MCI and Qwest," MCI said. "Additionally, as their contracts come up for renewal, a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction. These customer concerns, in the Board's view, pose risks in connection with a Qwest transaction that could negatively impact the value of the equity stake in a combined Qwest/MCI to be received by MCI's shareholders under Qwest's offer."

The increased offer should also quiet talk of inequity from MCI shareholders that had sprung up last month after Verizon bought out the company's largest shareholder, Carlos Slim, at $25.72 a share. At the time, a number of big MCI holders whined that all investors should get the same treatment.

On Monday, Qwest rose 26 cents to $3.68, while Verizon dropped 46 cents to $35.34 and MCI fell $1.06 to $25.47.