Qwest Is in Talks to Buy MCI, Further Roiling Telecom World

ALMAR LATOUR and DENNIS K. BERMAN / Wall Street Journal 3feb2005

MCI Inc. and Qwest Communications International Inc. are in talks that could lead to a merger as pressure on telecom companies to consolidate increases in the wake of SBC Communications Inc.'s agreement to purchase AT&T Corp. earlier this week.

Qwest, which has been in on-and-off talks with MCI for months, is offering about $6.3 billion to acquire MCI, close to its market value. The discussions have heated up in recent days, and the two companies have reached the point of discussing hard details like price and structure. Yet the talks remain highly fluid, people close to the situation say, and could break down.

What could easily derail Qwest's designs would be a bid by Verizon Communications Inc., which is also having exploratory talks with MCI. Verizon hasn't yet made up its mind whether it wants to bid. Several noncorporate buyers have also approached MCI in recent months.

Carefully watching developments is Carlos Slim, Latin America's richest entrepreneur, MCI's largest individual shareholder. He is considering a plan to take MCI private, according to people familiar with the matter. Mr. Slim didn't return a request for comment.

Whatever the outcome, it's clear that MCI is eager for a deal, say people close to the situation.

The sale of MCI would mark a quick end to the nation's independent long-distance telephone industry. Just six weeks ago, Sprint Corp. agreed to acquire Nextel Communications Inc. for $35 billion in a bid to define itself primarily as a wireless company.

Pressure on all the industry's companies to make a move has reached a frenzied pitch this week as those companies who haven't yet made a big deal eye their options. Some companies fear they may lack the scale and resources to compete as technological changes transform the industry and bring in an array of new competitors.

Stuck on the sidelines of the telecom business for years, Qwest is making an audacious move in going after MCI. Denver-based Qwest, which offers phone service in 14 Western states and has a market value of about $7.7 billion, is toiling under $17.2 billion in debt. The weakest of the regional Bells, Qwest hasn't been able to roll out high-speed Internet access in its entire territory. Having shed most of its debt in bankruptcy court, MCI's most attractive asset may be its balance sheet, which now has just $6 billion in debt and $5.6 billion in cash.

WorldCom acquired MCI for $37 billion in 1998, and the combined company had a market capitalization of more than $180 billion at its peak in 1999.

Qwest and MCI are considering different ways to finance the deal. Though each is struggling, people with knowledge of their plans argue that a deal would take away some challenges for Qwest and give it greater flexibility with its debt, which could even help finance the deal.

Qwest and MCI also are trying to figure out how best to price the deal, which could come without much of a premium to MCI shareholders. SBC's acquisition of AT&T also came without a premium, signaling a sense of urgency to do a deal. Yesterday, MCI shares rose 14 cents, to $19.68, as of 4 p.m. on the Nasdaq Stock Market. Qwest shares fell four cents, to $4.20, as of 4 p.m. in New York Stock Exchange composite trading.

Since joining MCI in 2002 as chairman and chief executive, Michael Capellas has worked to stabilize the company's operations in the wake of its scandal. The former chief executive of Compaq Corp. is widely seen as open to a sale, as is Richard Notebaert, Qwest's CEO, who has struggled to resolve his company's accounting troubles and clean up Qwest's balance sheet.

Mr. Slim had an adversarial relationship with MCI when the carrier tried to enter Mexico's market in the mid-1990s. Mr. Slim is the controlling shareholder in Teléfonos de México SA, a former monopoly and still the dominant Mexican phone company, which fought bitterly with MCI and AT&T over access to the Mexican market. After years of friction over alleged monopolistic practices, Telmex reached a tentative agreement with rivals backed by AT&T and MCI to end the dispute. The wrangling had led the U.S. to file a complaint against Mexico before the World Trade Organization.

Now, Mr. Slim seems to be buying up his former rivals in the region. Last year, Telmex bought AT&T Latin America, in a cash-and-debt deal valued at $207 million. It followed up that move by spending about $400 million to buy control from MCI of Brazilian long-distance carrier Embratel. Another curious thread in this knotty yarn: SBC, which just bought AT&T, owns a sizable stake in Telmex.

Just as the sale of AT&T marked the end of an era, the sale of MCI would close the chapter on one of the original competitors to the nation's telecommunications monopoly. Founded in 1968 as Microwave Communications of America Inc., MCI was the first company granted government permission to compete with AT&T.

In the early days, MCI gained a reputation as being a "law firm with an antenna" as it lobbied Congress and the Federal Communications Commission for a place in an industry ruled for decades by AT&T.

MCI was acquired by WorldCom Inc. in 1998. WorldCom's zeal for competition eventually came to overwhelm it, forcing the company into admitting an $11 billion accounting fraud and filing for bankruptcy protection. The company reverted to the named MCI when it emerged from bankruptcy last year.

Even though it has struggled recently, MCI is the last available option for local phone companies that want to break into the lucrative market of serving business customers from New York to Beijing. MCI has a global network that reaches more than 140 countries and carries much of the world's Internet traffic, a role it inherited by buying UUnet Technologies Inc.

With incredible speed, the three giants that have dominated the U.S. long-distance industry for decades are disappearing. MCI and AT&T are each facing a difficult reality as forces of technology and deregulation make their futures as independent companies bleak.

Consumers have taken to using wireless phones for long-distance calls and are buying discount packages combining local, long-distance and high-speed Internet service -- packages that the long-distance companies can't offer at a competitive price.

That's largely because federal regulators decided last year to end an eight-year-old rule that gave long-distance companies below-cost access to regional phone companies' local phone networks -- a contentious rule that had allowed AT&T and MCI to offer local phone service. In response, AT&T announced last summer that it would largely pull out of the consumer phone market, and MCI quietly made the same move, leaving both companies ripe for acquisition.

Subsuming the long-distance companies are the nation's local phone giants like SBC – and perhaps Qwest and Verizon – as they try to protect themselves against the onslaught of cable rivals, which are making rapid moves into the phone business. While the decline of the Bells' local phone business hasn't been as fast as that of the long-distance business, it has been shrinking for more than three years, with consumers using wireless phones and even Internet calling to substitute for traditional land-line phones.

Even in the telecom world, which has grown accustomed to lots of deals, the pace of the consolidation has left virtually all major players scrambling to reassess their options.

Verizon could be feeling pressure to consider buying MCI, with its corporate customers and global reach because of SBC's acquiring similar assets with its purchase of AT&T. Verizon also hasn't closed the door on making a bid for Sprint, which has agreed to merge with Nextel. Meanwhile, BellSouth Corp. is mulling its options now that its wireless partner, SBC, has teamed up with AT&T.

In theory, the spate of big telecom deals is meant to cut costs while boosting efficiency. After the industry's huge expansion in the late 1990s, these deals are essentially soaking up the overcapacity that has imperiled the industry for the last four years. If MCI and Qwest merged, the two companies could cut costs by eliminating duplicative networks and sales forces, while reducing the access fees that each pays to local phone companies to terminate calls.

MCI's future looked much brighter in 1996, when Congress unleashed competition across local and long-distance carriers. While expected to lose long-distance market share to the local phone companies, AT&T, MCI and Sprint, were also supposed to pick off millions of local customers riding the discounted wires leased by those same local competitors.

With recent regulatory rulings in their favor, the Bell companies are now all major players in the long-distance market -- while AT&T, MCI and Sprint are all seeking other options. "Here you have all three of them holding up a white flag for their traditional businesses," says Phil Weiser, an associate professor of law and communications at the University of Colorado. "It's remarkable that things have evolved in that way."

Meanwhile, as talks continue over MCI's future, Bernard Ebbers (see below), WorldCom's former chief executive, is now facing criminal charges of securities fraud in a Manhattan courtroom.

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Former WorldCom Accountant Doesn't Link Ebbers to Fraud

CHRISTINE NUZUM / Dow Jones Newswires 4feb2005

NEW YORK -- A former WorldCom Inc. accountant choked up on the witness stand as he recounted how he refused in the spring of 2002 to book an accounting entry that he thought was improper. But he didn't tie former Chief Executive Bernard Ebbers, who is on trial here on federal charges of conspiracy and fraud to the questionable accounting practices.

The witness, Mark Abide, testified yesterday that for most of 2001, he carried out orders to direct accounting adjustments that he questioned. He testified he was asked to direct his staff to update WorldCom's accounting records to match changes in the company's books after the quarter's close. He said he understood that then-Chief Financial Officer Scott Sullivan and then-Controller David Myers had requested the adjustments.

Defense lawyers say Mr. Sullivan directed the fraud without Mr. Ebbers's knowledge. Mr. Sullivan has pleaded guilty and is cooperating with prosecutors.

Mr. Abide said he put his foot down one day in April 2002 when he received a call from his supervisor, Buford Yates, and two other former WorldCom accountants, Betty Vinson and Troy Normand, requesting he book an accounting entry he questioned. Mr. Yates, Ms. Normand and Ms. Vinson "were silent for a while and they said they understood," he testified.

In May, Mr. Abide sought to alert an internal auditor. Disclosure of the fraud, which was later shown to have approached $11 billion, drove the company to file for bankruptcy protection in July 2002.

Mr. Abide testified under a nonprosecution agreement.

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