MCI accepts Verizon's offer

NEW YORK -- Don't count Qwest out of the bidding for MCI yet.

That seemed to be the message from investors Tuesday as MCI Inc.shares closed higher than the revised $23.50 per share cash-and-stock offer the Virginia-based long-distance company accepted earlierin the day from Verizon Communications Inc., the big local phonecompany based in New York.

The higher trading price amounts to a bet that competing suitorQwest Communications International Inc. of Denver isn't ready toaccept defeat in the face of Verizon's $7.64 billion offer for MCI.

MCI's shares rose 84 cents, or 3.7 percent, to close at $23.78 intrading on the Nasdaq Stock Market. The gap between that price andVerizon's offer is actually larger, since 40 cents of the $23.50 hasalready been paid to MCI shareholders as a quarterly dividend earlierthis month.

While MCI has been ravaged by the WorldCom scandal, bankruptcy andthe decay of long-distance as a viable standalone business, it stillpossesses a valuable base of 15 million customers and a nationalfiber-optic network for data and voice communications that Verizonand Qwest both find attractive.

Analysts were in wide agreement that Qwest has few better optionsfor survival in a rapidly changing telecommunications market. Thequestion, after two rejections by MCI in favor of lower-priced offersfrom Verizon, was how much more financially-troubled Qwest couldafford to pay.

Qwest officials declined to comment on MCI's decision, but JohnHodulik, industry analyst for UBS Investment research, wrote in areport to clients that, "We believe (Qwest) is weighing a secondincrease in its offer, given its lack of alternatives."

Verizon's apparent winning bid was about $1 billion higher than inits original deal to acquire MCI, reached back in mid-February, butstill about $800 million less than what Qwest offered to pay in itsmost recent proposal. The Qwest bid values MCI at $26 per share, or$2.50 more than the new Verizon agreement. But that figure alsocounts the 40-cent dividend.

Rich Nespola, chief executive of consulting firm TMNG Inc., saidQwest can't afford to back down so easily at this point. But hequestioned whether Qwest CEO Richard Notebaert has sufficientresources to both increase the bid and shoulder the cost of investingin MCI's network, which has been neglected amid that company's tripthrough the WorldCom scandal and bankruptcy.

"By his own admission, MCI needs some significant upgrade," saidNespola. "If you're upping the ante to pay for it, what are you goingto do to rehabilitate it? They're already saddled with $17 billiondebt. How much higher can they go?"

It is the second time MCI has opted for a lower payment fromVerizon out of concern about Qwest's questionable financial healthand business prospects. When MCI's board accepted Verizon's original$6.75 billion offer in mid-February, it did so with an $8 billion bidon the table from Qwest.

New York-based Verizon tried to hold its ground on price after theinitial agreement even as Qwest rallied some MCI investors to agitatefor the higher-priced bid. But in the ensuing weeks, Qwest raised itsbid by a half-billion dollars, and Verizon's stock has declined,further widening the gap between what the two companies were offeringMCI, which is based in Ashburn, Va.

That intensified the pressure on MCI's board to reconsider Qwest'scourtship or at least secure more money from Verizon.

The new deal comes about two months after SBC Communications Inc.agreed to pay $16 billion to acquire AT&T Corp., setting off thescramble by Verizon and Qwest to respond with a buyout of MCI.

AT&T and MCI are both losing revenues and customers with thecollapse of long-distance phone service as a viable standalonebusiness.

The two companies have been hurt badly by competition from Bellssuch as Verizon and SBC, as well as from cell phones and Internet-based phone service, all of which offer unlimited national callingfor a set rate.

The situation worsened dramatically last year when a court put anend to federal requirements that the Bells lease their local phonelines to rivals at discounted rates, making it more expensive forAT&T and MCI to compete with their own unlimited local and long-distance plans.

On Tuesday, Verizon's shares rose 14 cents to close at $34.86 onthe New York Stock Exchange, where Qwest rose 4 cents to close at$3.79.