Ntop setting an example for Qwest ..
[“Toss in a small, specialty company like Net2Phone (NTOP, news, msgs), which provides voice-over-Internet-protocol (VoIP) communication services, and/or a privately held cable operator such as Northland Cable TV, and Qwest could succeed by hitting a bunch of singles rather than going for the home run.”]
Without MCI, Qwest's future sounds weak:
It's unlikely to capture MCI despite plans to raise its rejected bid. If it can't find an acquisition candidate, it'll remain a bit player in the local telephone market.
By Robert Walberg
MSN Money
February 23, 2005
moneycentral.msn.com
Jilted at the altar by MCI, Qwest has decided to fight back. Instead of quietly licking the wounds and moving on, Qwest's top management opted to bolster its offer in a bid to woo the long-distance carrier out of the loving arms of telecom heavyweight Verizon Communications (VZ, news, msgs).
Apparently, Qwest Communications' (Q, news, msgs) CEO Richard Notebaert hasn’t read Greg Behrendt and Liz Tuccillo’s best-selling book "He's Just Not That Into You." If he had, he'd know that MCI (MCIP, news, msgs) was flattered by the offer, but the long-distance company has no real interest in hooking up with Qwest for the long-term -- even if Qwest sweetens the deal with more cash up front.
Granted, a number of MCI shareholders want the company to go to the highest bidder and are suing to force just such an outcome. The Wall Street Journal reported that hedge funds are taking positions in MCI to pressure the company to consider a new Qwest offer. In turn, that might force Verizon to sweeten its offer.
Ultimately, look for MCI to end up with the more financially stable Verizon, because such a marriage is likely to be much more prosperous over the long term. Unfortunately for Qwest, such an outcome could spell serious trouble.
The reason: Qwest needs MCI much more than MCI needs Qwest. To compete against heavyweights like Verizon and SBC Communications (SBC, news, msgs), which recently agreed to acquire AT&T (T, news, msgs) for $16 billion, Qwest needs to grow its customer base, expand its markets and shore up its balance sheet. That's why acquiring MCI's more stable business customers, Web backbone and strong balance sheet would be an ideal fit for the relatively small, debt-laden Qwest.
It's just too small
Without MCI, Qwest is nothing more than a relatively small regional player with massive debt and a very uncertain future. No wonder the company is willing to engage in an all-out bidding war with Verizon. Its future as a viable business is at stake.
Here are the basics of the two offers for MCI:
Verizon's bid of $6.75 billion (or $20.75 a share) included stock, about $488 million in cash and a special dividend worth $1.46 billion or about $4.50 per share.
Qwest's last offer of about $8 billion (or $24.60 a share) included $7.50 a share in cash, $15.50 of its stock and a guarantee to MCI shareholders that they'd receive four dividend payments totaling $1.60 per share.
Now, the extra $1 billion or so that Qwest is offering for MCI is surely nothing to sneeze at, but it's also not quite that substantial given that the bulk of the deal is in Qwest stock, which has no certain value. This is why MCI management favors the lower bid from the more financially secure Verizon.
Qwest is looking to sweeten the deal by tossing in more upfront money, but there's nothing the Denver-based company can do to gloss over the fact that it is simply not a business or financial heavyweight.
The stark contrast between Qwest and Verizon
Over the last year, Qwest pulled in revenue of $13.8 billion and posted a loss of 98 cents per share. The company ended the year with more than $17 billion in debt. By comparison, Verizon generated earnings of $2.80 per share on revenues of more than $71 billion.
If you were looking for a long-term partner, who would you pick? Therein lies Qwest's problem. It doesn't matter if the company sweetens the pot for MCI with more cash up front. MCI's CEO and board will do what's in the best long-term interest of its shareholders, and that's a deal with Verizon. Of course, Verizon could make it easy on MCI by simply upping its offer by about $1 billion, removing any doubt as to which is the best deal.
So let's assume that despite a last-ditch effort, Qwest gets left at the altar. If so, where will the company turn next? More importantly, can it survive over the long term?
With the best long-term carriers off the market, Qwest might be best served focusing on the wireless and/or cable businesses. Unfortunately, many of the wireless companies have already partnered up in recent months, leaving the pickings there somewhat slim.
However, Qwest might want to start talking to a company like Cable and Wireless (CWP, news, msgs), based in London. It's roughly the same size as MCI in terms of market capitalization. It has a decent balance sheet with almost $5 billion in cash and relatively modest debt, and it has a core of more stable business clients and technologies that might make a nice compliment.
Of course, it's tough to see what Cable and Wireless would see in Qwest. Cable and Wireless operates in 80 countries. Qwest operates in 14 states. A deal would offer few obvious cost savings and immediate synergies.
Hitting singles
Looking more locally, Qwest might want to consider one of its neighbors, Time Warner Telecom (TWTC, news, msgs), headquartered in nearby Littleton, Colo. Though Time Warner Telecom would offer little help on the balance-sheet front, such a partnership would expand Qwest's client base and accelerate its entry into the business market. A potential stumbling block is the fact that Time Warner (TWX, news, msgs) owns a very large percentage of Time Warner Telecom -- 43.6% of the equity and 71% of the voting stock, according to the 2004 proxy statement. But money talks, so you never know what might happen. And with a market cap of only $476 million, Time Warner Telecom would be a lot less expensive to buy than MCI.
Toss in a small, specialty company like Net2Phone (NTOP, news, msgs), which provides voice-over-Internet-protocol (VoIP) communication services, and/or a privately held cable operator such as Northland Cable TV, and Qwest could succeed by hitting a bunch of singles rather than going for the home run.
Regardless of where it turns next, if Qwest doesn't want to end up as the corporate equivalent of Dickens' Miss Havisham, it's going to have to bounce back quickly from the probable loss of MCI and put itself back into the game.
The telecom industry is changing quickly, however, and remaining a bit player in the local telephone market won’t cut it over the long term. Qwest needs to figure out a way to stay competitive with the likes of SBC, Sprint (FON, news, msgs) and Verizon, even if it means playing small-ball rather than swinging for the fences. Unfortunately, given profit margin pressures and a large debt burden, the clock is ticking. With every deal that competitors make, Qwest's options dwindle.
Until Qwest defines a new course for itself, you might do well to steer clear of the stock. The company's long-term future is too uncertain, and the short-term reaction to the loss of MCI is unlikely to be pleasant. |
