Verizon Makes Good Move with MCI Purchase

By beating out rivals Qwest and BellSouth for ownership of MCI, Verizon acquires wider opportunities as well as consolidation challenges.

Verizons purchase of MCI earlier this week will strengthen its business, provide access to lucrative business and government contracts, and, most importantly, prevent rivals from snapping up the Ashburn, Va. company.

In a coup likely to make rivals Qwest Communications International Ltd. and BellSouth Corp. sweat, Verizon Communications Inc. agreed to buy MCI Inc. for $6.7 billion in cash, stock and dividends. The merger follows two telecommunications mega-mergers last year: SBC Communications acquisition of AT&T Corp. and Sprint Corp.s purchase of Nextel Communications Inc.

Although MCI had its share of suitors—both Qwest and BellSouth were pursuing the company as well—company executives chose to sell the company to Verizon, despite the fact that Qwest offered a larger incentive package.

Verizons financial stability as well as synergies in network infrastructure and customer base made the choice of Verizon a sound one, said Taher Bouzayen, vice president and long-distance sector analyst at Atlantic-ACM, a Boston-based research firm.

"Financially, although Verizon has some large debt, it has the financial strength to pay off that debt and a framework thats large enough to absorb a company like MCI, which came out of bankruptcy with very little debt," he said.

Verizon may have pushed so hard to buy MCI simply because others wanted it, noted Sean Hackett, senior analyst at Yankee Group of Boston, Mass. "It was a defensive move," he said. "It was about taking MCI out of play so somebody else couldnt buy it."

The move also allows Verizon to exploit its deep presence in the Northeast and strong branding by cross-selling many of MCIs services. "It helps to be able to take a brand that has been beaten up as much as MCIs has and leverage that brand equity," Hackett said.

But the reason Verizon was so intent on buying MCI may have been for its lucrative business and government contracts—an area where former RBOC Verizon simply didnt have much of a foothold.

/zimages/3/28571.gif To read more about the history of MCIs choice of Verizon over Qwest, click here.

Access to business contracts, in fact, also was one of the main reasons why SBC acquired AT&T, Bouzayen noted. "They are all hungry for business customers, because thats where most of the profit is. Those are the accounts where you build your margin."

Now that Verizon has a stronger foothold in the business arena, it would do well to exploit the combined technological strength of the two companies to provide better prices and service for its business customers, Bouzayen said.

"MCIs strength is on the long haul portion of the network, while Verizon has the last mile. Now they can offer end-to-end services at relatively good prices, once they work out some interoperability issues caused by merging two types of networks," he said. Bouzayen predicts that the integration will happen quickly.

In the end, it may be the business customers who really win. Not only will businesses experience less competition in the telecommunications marketplace, but they should expect to see price stabilization, Hackett predicted.

Although experts believe the move was a good one, the road may be less than smooth as consolidation gets underway. In addition to consolidating a host of business processes, Verizon will face the mammoth challenge of integrating MCIs confusing billing system with Verizons more stable one.

MCIs billing system is a cobbled-together patchwork system that combines bits and pieces of the nearly 50 companies it has acquired over time. Four or five years after an acquisition, its not unusual for a customer to receive multiple bills from companies owned by MCI instead of one integrated bill, Bouzayen noted.

"Verizon has a great billing platform that is extremely well managed, and if it succeeds in incorporating and integrating MCIs billing system into its platform, it will be a very successful company, but it will take some time," he said.

Despite challenges, analysts expect the combined company to succeed and prosper. Atlantic-ACM predicts that the combined company will generate $18.6 billion in 2005 for long-distance services alone, a number that will grow to $21.6 billion in 2009.

The unanswered question, of course, is what happens to erstwhile suitors Qwest and BellSouth, as well as to Sprints wireline business.

/zimages/3/28571.gifClick here to read more about some of BellSouths plans for future growth.

"It really leaves them hanging. In those businesses that require scale to succeed, such as traditional voice/data-type transport businesses, BellSouth and Qwest will have to decide whether they want to compete," Hackett said.

Given enough time, the market may experience further consolidation, ending up with three or four mega-companies competing with each other, Bouzayen said.

"I could see the wireline business of Sprint combined with Qwest, or perhaps companies like Level 3 or Global Crossing could come into the mix in some fashion," he said. "Maybe were really reversing the wheel and going back to a pre-1984 RBOC system. Only time will tell."

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