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    Mci Takeover Battle Analysis

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    Aastha Swaroop
    Verizon and Qwest both sought to acquire MCI after it emerged from bankruptcy. Verizon had a stronger financial position with less debt, making its $8.4 billion offer less risky than Qwest's $8.6 billion bid. However, Qwest argued its offer allowed MCI shareholders to own over half the combined company, providing more upside if MCI's value increased. The MCI board had to consider fiduciary duties to shareholders and the fundamental value of the two companies. After several rounds of bidding, the MCI board ultimately accepted Verizon's highest offer of $26 billion due to the greater financial strength and certainty of completing the deal.

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    Mci Takeover Battle Analysis

    Uploaded by

    Aastha Swaroop
    1K views13 pages
    Verizon and Qwest both sought to acquire MCI after it emerged from bankruptcy. Verizon had a stronger financial position with less debt, making its $8.4 billion offer less risky than Qwest's $8.6 billion bid. However, Qwest argued its offer allowed MCI shareholders to own over half the combined company, providing more upside if MCI's value increased. The MCI board had to consider fiduciary duties to shareholders and the fundamental value of the two companies. After several rounds of bidding, the MCI board ultimately accepted Verizon's highest offer of $26 billion due to the greater financial strength and certainty of completing the deal.

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    MCI Takeover battle

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    Verizon and Qwest both sought to acquire MCI after it emerged from bankruptcy. Verizon had a stronger financial position with less debt, making its $8.4 billion offer less risky than Qwest's $8.6 billion bid. However, Qwest argued its offer allowed MCI shareholders to own over half the combined company, providing more upside if MCI's value increased. The MCI board had to consider fiduciary duties to shareholders and the fundamental value of the two companies. After several rounds of bidding, the MCI board ultimately accepted Verizon's highest offer of $26 billion due to the greater financial strength and certainty of completing the deal.

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    1K views13 pages

    Mci Takeover Battle Analysis

    Uploaded by

    Aastha Swaroop
    Verizon and Qwest both sought to acquire MCI after it emerged from bankruptcy. Verizon had a stronger financial position with less debt, making its $8.4 billion offer less risky than Qwest's $8.6 billion bid. However, Qwest argued its offer allowed MCI shareholders to own over half the combined company, providing more upside if MCI's value increased. The MCI board had to consider fiduciary duties to shareholders and the fundamental value of the two companies. After several rounds of bidding, the MCI board ultimately accepted Verizon's highest offer of $26 billion due to the greater financial strength and certainty of completing the deal.

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    MCI TAKEOVER BATTLE

    MAYANK JOSHIPURA

    The motivation of MCI shareholders,


    the MCI board, Verizon & Qwest
    MCI
    AT&T-SBC deal set the stage for Verizon
    offer for MCI
    MCI emerge from Bankruptcy with $5.5
    bn of cash and $6bn of debt compared
    to $30 bn in 2001
    Good business in enterprise services
    with strong long distance presence
    Greenhill was an advisor to MCI board

    Verizon
    Little uncertainty about the deal due to size and
    strength of Verizon
    Debt of $39bn but market cap of $100 bn
    Verizon-MCI could well be counterweight to SBCAT&T. Bear Stearns was the advisor
    Verizon was significantly less leveraged compared to
    quest both on market and book value based D/E or
    D/V ratio (with or without adjusted for cash)
    Larger asset base and low financial leverage can
    provide attractive fund raising opportunity and
    therefore low uncertainty on completion of deal

    Qwest
    Much smaller than Verizon. Acquired US West in 2000
    and touched market cap of $68 bn year 2000
    Now only $7bn in market cap and its offer for MCI is
    more than its market cap
    $17bn in debt and $1.7bn in cash
    Difficult to raise funds for the deal and greater
    uncertainty
    However, MCI shareholders can own more than half of
    combined entity compared to only small portion if
    acquired by Verizon
    So if MCI is currently undervalued Qwest offers much
    more upside to MCI shareholders

    Fiduciary Duties
    If firm is not for sale board can turn
    down offer higher than its market value
    if feels that remaining independent is in
    the interest of firm
    If for sale then it has to go with higher
    of the cash offer if its a cash deal
    In case of cash + stock swap or stock
    swap deal board has discretion in terms
    of favoring one offer over the other.

    Shareholders horizon
    If shareholders are interested in owning stake
    in acquirer after the deal for long time should
    board consider fundamental value of
    acquirer?
    Can management of target play trick by
    rejecting genuine offers on the ground of
    fundamental value?
    In 1998, BT and GTE made offers for MCI,
    WorldCom offered more in terms of stock
    price prevailing then.

    Stock market driven


    acquisitions
    Acquirers may use overvalued equity as Cheap currency
    AOL-Time Warner is a classic example
    Acquisitions made by WorldCom and Qwest in 2000 are
    classic example in the case/industry
    Letter from Verizon CEO to board of MCI highlights
    Qwest promised shareholders of US West with increase in
    revenue by $12 billion ($4.1bn incremental EBITDA!) and
    operating cost savings of $4.4 bn and reduced capex by $2.2 bn
    cumulatively within five years
    Result? Actually revenue and EBITDA went down! Everyoneemployees, customers, suppliers suffered! Qwest stock price
    came down from $50 to low single digit.
    False promises at the time of WorldCom-MCI deal led WC to
    accounting fraud. (Exhibit 10)

    Valuing the two offers:$7.6 bn vs.


    $8.4bn
    Use of collars (Exhibit 7)
    Verizon offers $8.75 in cash and at least $14.75 in
    stock.
    i.e. if Verizon if trading at $30 then the exchange
    ratio is $14.75/30 but if it trades at $14.75 its 1:1.
    In no circumstances Verizon offers ER of 0.4062,
    which means if stock crosses $36.31 MCI
    shareholder will have more upside from this call
    option
    Can be interpreted as $23.5 + 0.4062 call options

    Qwest offer
    $10.5 cash + $15.5 in stock
    However it provides $15.5 only if stock price remains
    within $3.74 to $4.57. i.e if Qwest is trading at $4
    then MCI shareholders get 15.5/4 shares of Qwest
    Under no circumstance MCI shareholders get fewer
    than 3.392 shares of Qwest which means 3.392 call
    options at $4.57.
    But, under no circumstances Qwest shareholders get
    more than 4.1444 shares of Qwest. Which means if
    price falls below $15.5/4.1444 MCI shareholders may
    not get $15.5. Similar to short position in put where
    fall in stock price leads to unlimited loss.

    Valuation
    MCI shares (000)= Exhibit
    5

    326,431

    Rf = ln (1 + Rate in table A)

    3.35%
    Verizon

    Qwest

    Cash component-Exhibit 7

    $8.75

    $10.5

    Stock component-Exhibit 7

    $14.75

    $15.5

    Current Exchange RatioExhibit 7

    0.4231

    4.0897

    Min exchange ratio-Exhibit 7

    0.4062

    3.392

    Max exchange ratio-Exhibit 7

    None

    4.1444

    Volatility-Implied from page 5

    19%

    45%

    Price-page 5

    $34.86

    $3.79

    Time to completion-page 5

    Div yield = ln (1 + yield on


    page 5)

    4.32%

    0%

    Valuation cont.
    Verizo
    n

    Qwest

    Bond

    [email protected] Bond
    2

    [email protected] Calls@4.
    0
    57

    Quantity

    23.5

    0.406

    26

    -4.144

    3.392

    Rf

    3.35%

    3.35%

    3.35
    %

    3.35%

    3.35%

    Div yield
    T

    4.32%
    1

    Vol

    19%

    45%

    45%

    S0

    34.86

    3.79

    3.79

    X (S0/ER)

    36.31

    3.74

    4.57

    d1

    -0.17

    0.33

    -0.12

    d2

    -0.36

    -0.12

    -0.57

    BS Price per option

    1.82

    0.58

    0.46

    Connected PV

    23.46

    24.31

    Merger Arbitrage & Price


    pressure
    Merger arbitrage in cash deal is simple- buy target stock at

    discount to cash offer price from the market and simply wait
    for deal to conclude
    In stock swap deal buy target shares and short acquirers
    share based on ER
    In a collar deal arbitrageur must use either options or
    dynamic delta hedge. With each MCI share bought one has
    to short 0.18 Verizon or 3.08 Qwest shares depending on
    probability assigned by him.
    This leads to huge price pressure on Qwest shares and
    therefore decline in price. Below a particular price there is
    no portion to MCI shareholders cash equivalent of stock
    component and that should be kept into consideration
    MCI has many hedge fund investors as it has just emerged
    from bankruptcy

    What happened?
    March 29- Verizon increased bid to $23.50, MCI board
    accepted and signed amended MA
    March 31- Qwest increased cash component to $13.1 and
    total bid to $27.5
    April 5-MCI board stayed with Verizon and rejected Qwest bid
    April 9- Verizon agreed to buy 43.4 mn MCI shares from
    Carlos Helu at $25.72
    April 21- Qwest revised bid with cash component of $16 and
    total bid $30
    April 23- MCI board accepts it
    May 2- Verizon revised bid to $26 and MCI signs AMA. Qwest
    exits the race
    Jan 6, 2006- Verizon completes acquisition of MCI

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