The Verizon-MCI Merger
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Case Code: BSTR259 Case Length: 19 Pages Period: 2000-07 Pub Date: 2007 Teaching Note: Not Available |
Price: Rs.300 Organization: Verizon, MCI Industry: Telecom and Broadband Countries: US Themes: Mergers, Acquisitions, Strategic Alliances |
Abstract Case Intro 1 Case Intro 2 Excerpts
"Verizon's acquisition of MCI will ensure the continued presence of a national, full-service company with the technology and financial strength, to deliver a broadband future and create economic growth."
- Tom Tauke, Executive Vice President, Public Affairs, Policy and Communications, Verizon Communications Inc., in 2005.
"It's a great deal for Verizon. The shareholders of MCI didn't get a great deal, but maybe the combined companies will be more powerful and the returns will offset that."
- Jay Arnold, Portfolio Manager at Abacus Asset Management, in 2005.
Introduction
On March 30, 2007, Emmet G Sullivan, Judge at the District Court of Columbia, ruled that the US-based Verizon Communications Inc. (Verizon), one of the leading communication providers in the world, could legally merge with MCI Inc. (MCI). This ruling reaffirmed the decree of the Department of Justice (DoJ) issued in October 2005, that had earlier allowed the merger. DoJ's decree had been challenged in court by Comptel, representing the competitor companies that could be affected by the merger and Alliance for Competition in Telecommunications (ACTel), a group of smaller telecommunication companies. Analysts said that further appeal on the merger was unlikely after the ruling.
When the Verizon-MCI merger was announced in March 2005, consumer groups and the American Antitrust Institute (AAI) expressed concern that the merger, and the merger of AT&T and SBC would lead to a duopoly in the US telecom market. According to Jonathan Rubin, Research Fellow at AAI, "The Verizon/MCI and SBC/AT&T mergers would create a 'duopoly of one-stop shops' selling a wide range of telecom services. Two large, vertically-integrated firms may find the gains from allocating markets and avoiding vigorous direct competition too great to resist. In such a scenario, the presence of a number-three player, a competitive-fringe or a market maverick, can make all the difference between a dynamic competitive market and a stilted, static one. (Refer Exhibit I for more about the telecom industry in the US).
Verizon announced its intention to acquire MCI in February 2005. The deal was finalized only in October 2005, as another telecom company, Qwest Communications International Inc. (Qwest) was also vying for MCI and offered higher bids. Subsequently, Verizon increased its offer price for MCI, which was still lower than Qwest's offer. However, the management of MCI chose to merge with Verizon due to long term benefits that would occur to MCI's shareholders. The merged entity was named Verizon Business, which functioned as a division of Verizon, and integration was completed in January 2006.
In the financial year 2006, Verizon Business recorded revenues of US$ 20.5 billion and its operations reached more than 2,700 cities in 150 countries. Verizon Business offered large business customers advanced IP services, managed network services and virtual private networks. The customers of Verizon Business included 94% of Fortune 500 companies. According to Benjamin Powell, Director, Center on Entrepreneurial Innovation, The Independent Institute, and Assistant Professor, Economics, San Jose University, "The Verizon and MCI merger is driven by competitive pressure. Sprint, Motorola, and Intel are working together to provide high-speed wireless communications and other firms are innovating as well. Verizon is a regional telephone service provider and a major competitor in wireless telecommunications. MCI is a long-distance carrier and a major provider of Internet backbone. Nobody can predict what innovations a merged Verizon-MCI will create, but the increasing integration of communications has made the potential synergies between these companies obvious."...
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