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Marguerite Reardon


Dawn Kawamoto

Staff Writer, CNET

Verizon Communications has sealed a $6.7 billion deal with long-distance provider MCI as the telecommunications industry continues its spasm of megamergers.

On Monday, Verizon said it will pay $4.8 billion in stock and $488 million in cash for MCI. Verizon will also pay special dividends of $4.50 per share, or nearly $1.5 billion. This makes the total deal for MCI worth more than $6.7 billion.

The acquisition of MCI comes two weeks after SBC Communications, another Baby Bell, announced it was buying the No. 1 long-distance carrier AT&T for $16 billion. The SBC-AT&T deal has changed the telecommunications landscape, pitting the three remaining regional telephone companies–Verizon, BellSouth and Qwest Communications International–against each other in several markets.

In December, Sprint announced the acquisition of Nextel Communications in a $35 billion merger that will create a giant in the cell phone business to better compete against the top two providers, Cingular Wireless and Verizon Wireless. Verizon Wireless is a venture of Verizon Communications and Vodafone Group.

Verizon Communications, which is primarily a regional player, will use MCI’s nationwide and global Internet Protocol networks to help it reach out to MCI’s business customers–a group among which Verizon has had little success. Enterprise customers could also help New York-based Verizon grow its wireless business.

“This is the right deal at the right time,” Verizon Chairman and CEO Ivan Seidenberg said in a statement. “We have been evaluating a transaction with MCI for some time, and now we have the opportunity to reach an agreement at the right price that works for both companies and at a time when MCI is gaining momentum. It is a natural and logical extension of Verizon’s strategy to transform our company to serve growth markets and offer broadband technologies.”

Qwest had also put a bid in for MCI. After Verizon’s intentions became known last week, Qwest supposedly edged up its offer from $6.3 billion to $7.3 billion, according to published reports. Qwest was viewed as a less appealing acquirer due to its poor growth potential and large debt load.

“It was not only a matter of economics, but also a matter of which deal offered the best strategic value going forward,” said Rick Black, senior telecom analyst with Blaylock & Partners. “Even though Qwest offered more, you have to ask yourself if Verizon will be more competitive in the future.”

One rival played down the notion of an increased threat from an MCI-enhanced Verizon.

“It doesn’t change anything for BellSouth,” said Jeff Battcher, a spokesman for the company. “Our focus is on wireless and broadband, and that doesn’t change for us (with the Verizon-MCI merger).”

He declined to comment on industry speculation that BellSouth had been interested in buying MCI.

The absorption of the two biggest long-distance carriers is further evidence that the telecommunications market is changing. Telephone companies will have to offer more than just local or long-distance voice services to compete with new competitors such as cable operators and Net telephony providers.

“It’s a buyers market for long-haul networks, so there’s no need to own the assets,” said BellSouth’s Battcher.

While buying MCI saves Verizon the time and money of building its own nationwide network to serve business customers, analysts say that MCI’s network needs major upgrades and investments.

“MCI has been underinvesting in their network,” said Brad Wilson, an analyst with Legg Mason. “Just looking at the numbers, it seems like Verizon is going to have to invest a few billion to get the network up to snuff.”

Analysts also point out there will be other challenges ahead for the two companies. For example, the companies will not only have to link up their networks, but also find a way to manage MCI’s large pool of roughly 60 different billing systems, Black said.

“MCI has grown through acquisitions over the years, and so they have all these different billing systems,” Black said. “They used to have about 220 different billing systems, but now it’s down to about 60, which is still large.”