Qwest's Luck of the Irish - TheStreet

Heeding Wall Street's sage counsel,


(VZ) - Get Report

cleared merger partner



to chat with stubborn suitor




Verizon said it would allow two weeks of talks in an effort "to address recent market speculation regarding Qwest's claims that it can deliver greater value to MCI's shareholders." Verizon, which has a noncompete clause in its merger pact with MCI, indicated discussions could continue through March 17.

MCI said once again that it would review Qwest's latest bid.

The step comes a day after Qwest left investors abuzz with a promise to

take an ax to the combined workforce should it win MCI. Wednesday's remarks show Verizon and MCI are starting to heed the rumblings of big MCI shareholders who have criticized the terms of the Verizon merger as insufficient.

The talks also show that Qwest has had some success in taking its case to Wall Street. On Tuesday, Qwest CEO Dick Notebaert campaigned for his company's proposal at a gathering of analysts in New York. Among the advantages Qwest says it would bring to MCI is cost cuts, which would include the firing of 15,000 workers at the combined company -- double the number that Verizon has proposed. The presentation boosted shares in Qwest and MCI, suggesting that investors are now expecting a round of higher offers for MCI.

Ever since MCI snubbed Qwest last month to sign up with Verizon, some of MCI's large shareholders have been critical of the board's decision. They point out that Verizon's $6.8 billion merger deal is simply not as lucrative as the $8 billion offer from Qwest.

MCI on Wednesday offered its rationale for making its choice, pointing to Verizon's financial strength and wireless offerings. The company also provided further details of Qwest's repeated merger offers.

MCI says it rejected two of Qwest's original proposals from Feb. 14. One was an all-cash bid of $18.27 a share with an additional dividend of $1.60 a share to be paid from MCI's piggy bank. The second offer was a stock-and-cash deal swapping 3.735 Qwest shares along with $7.50 in cash for each MCI share.

MCI opted for the Verizon offer, and Qwest subsequently modified its $8 billion stock and cash proposal by attaching a fixed price or collar to the stock component and accelerating the cash payout to shareholders.

An MCI representative said the board was sincerely engaged in the review process. "This is an example of the type of good governance our board has followed all along," says the rep.

Industry observers say MCI obviously chose to go with Verizon because it is financially stable, unlike Qwest, which operates in the red and is saddled with heavy debts. But some MCI shareholders, like Lee Cooperman, have been particularly critical of MCI's decision to ignore Qwest and go with Verizon's lower bid.

In response to the growing criticism, MCI Chairman Nicholas Katzenbach released a

letter Tuesday saying MCI has been anything but inattentive to Qwest. Teams from MCI and Qwest have met 25 times in person and 50 times by phone in the past seven months, according to the letter. And during that time, the MCI board has met 26 times "in which strategic options, including opportunities with Qwest, were discussed."

Verizon says it is in "the best interest of shareholders" that Qwest's claims and merger proposals are adequately reviewed.

"We believe that this process will result in MCI reaching the same conclusion that it reached after seven months of discussions with Qwest," said Verizon in a press release.

On Wednesday, MCI rose a penny to $23.37, Verizon rose 4 cents to $36.29 and Qwest dropped 9 cents to $3.96.