Tuesday, May 03, 2005

Verizon grabs MCI

VZ has won the battle for MCIP, outbidding Q. MCIP was the last major independent long-distance company. VZ is paying through the nose for MCI, paying as much as 25% higher than its initial bid, which MCI shareholders should thank Q for. MCI was valued at 6x estimated 2006 EBITDA whereas VZ itself trades at a 5.4x. MCI has declining EBITDA and VZ paid a premium. VZ was after the corporate customers (60,000 in 150 countries) and wanted those customers even if it had to pay a premium.
VZ also believes it can save $7B through cost synergies. This reminds me of HPW/CPQ merger where huge cost savings were touted as a driver for the flawed merger. We all know how those cost synergies were achieved, by cutting entire groups from both companies and losing customer as well as employee morale.
I believe carriers see their future as being very bleak with growing competition from cable and will do any thing to prolong their demise. Better strategy might be to focus on growing businesses like wireless or growth opportunities like FTTx and cutting losers. But carriers think being vertically integrated and offering bundles of services could save them. It remains to be seen if this strategy works, my gut tells me not to hold my breath.


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