Updated from 11:47 a.m.
outbid itself again,
CEO Ivan Seidenberg issued a scathing critique of the company's pursuit of
Earning his Wall Street nickname "Ivan the Terrible," Seidenberg calls Qwest a dead-end telco so driven to merge that it has stooped to making bogus projections. For seven pages he attacks Qwest's finances, its business outlook and its synergy claims, which "do not pass a common sense test," according to the letter.
"No wonder there appears to be a desperate quality to Qwest's efforts to acquire MCI," Seidenberg writes in the letter, filed Wednesday with the
Securities and Exchange Commission
. "Explaining in the future the failure to have delivered on exaggerated promises of synergies is understandably preferable to the stark reality of its current stand-alone financial prospects."
The move comes as Qwest is preparing to raise its stock-and-cash bid for MCI to about $26 a share from around $24.60, or $8 billion, according to media reports. Defending Qwest's plans, CEO Dick Notebaert fired back later Wednesday, saying that "historical commentaries serve no purpose as we look to the future of the communications sector and foster competition."
Continuing in that vein, Notebaert added, "The new company will be financially strong, with significant free cash flow, and offer investors a unique growth opportunity." The CEO made the remarks in a midday press release promising to "demonstrate our commitment to winning MCI."
Returning to the populist mode he has operated in for much of this battle, Notebaert added, "Let fairness, economics, and the best interests of shareholders decide this matter."
MCI agreed last month to merge with Verizon in a stock-and-cash deal valued at $20.75 a share, or $6.75 billion. It did so after rejecting multiple approaches from Qwest, arguing that the Denver telco isn't financially strong enough to make the combined company into a stout competitor in the cutthroat telecom business.
Seidenberg's broadside comes the day before a two-week negotiation period between MCI and Qwest is due to expire. Verizon, which put a noncompete clause in its agreement to buy MCI, earlier this month gave the sides time to talk in what it called an effort to clear the air.
Industry observers say reports that Qwest is preparing a higher offer suggests it has been told that its current bid isn't good enough. Also, investors and analysts say Qwest's chances aren't looking very good at this point, a notion reflected in the stock's 3% decline Wednesday.
Qwest's arguments have been defused, says one hedge fund manager with no positions in these stocks. "I think they are going to lose this thing," says the money manager.
Qwest didn't make enough of a case that mergers between MCI and Verizon and
would result in an anticompetitive duopoly, says the hedge fund manager. "Now they are bidding against themselves," says the manager. "Who bids against themselves?"
In Wednesday's letter, Seidenberg points out that Qwest posted a drop in revenue last year and an increase in operating losses. He also notes that Qwest finished last year with $17.3 billion in debt, with all its debt rated junk by major rating agencies.
The executive also makes light of Qwest's claims that it can make the MCI merger work by slashing costs. He notes that a combined Qwest-MCI would have an enterprise value of just $12 billion, compared to $105 billion for Verizon-MCI and $95 billion for the planned linkup of SBC and AT&T. Yet Qwest hopes to create so-called synergies of $15 billion or so -- in line with the SBC-AT&T projections and twice as big as Verizon's own cost-cutting plan. "Qwest claims the synergy value would be equal to about 122% of pro forma combined equity value," Seidenberg says.
Tipping his hat to Qwest's bubble-era legacy, Seidenberg also compares the company's promises to those of its scandal-ridden former management and of WorldCom. Of course, Seidenberg's remarks come just a day after a federal jury convicted former WorldCom CEO Bernie Ebbers of securities fraud, and after the SEC sued ex-Qwest chief Joe Nacchio for allegedly leading a $3 billion accounting fraud of his own.
"Qwest incredibly claims that it can deliver about $1.7 billion of synergies in the first year following the consummation of its proposed acquisition of MCI, or about two-thirds of the annual run-rate of $2.5 billion to $2.9 billion of total synergies that Qwest asserts can be achieved," Seidenberg says. "Telecom industry executives with actual experience serving major corporate customers know this sort of network integration takes time, money and, most significantly, experienced personnel familiar with the customer's requirements. And yet, Qwest talks about headcount reductions of 12,000 to 15,000, which would almost certainly include personnel critical to any integration plan."
That said, some large MCI shareholders have balked at the Verizon price and urged MCI to reconsider a merger with Qwest, even though breaking up the Verizon deal would cost MCI $200 million and stick it with a lower-quality competitor.
Earlier in March, Qwest set off a rally in its stock by promising the mass firings should it complete the MCI deal. But those gains have since dissipated.
On Wednesday, Qwest slipped 9 cents to $3.77, Verizon dropped 38 cents to $35.30 and MCI lost 28 cents to $23.75.
What seems likely at this point, according to industry watchers and investors, is that Verizon may come back with a slightly higher offer than its original bid. The MCI board has been hotly criticized for accepting a lower offer from Verizon. The board clearly prefers a future with Verizon, but shareholder complaints have them on the hook.
"I think if Verizon bumped up its bid a little, the board could justify
its decision," says the hedge fund manager.