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2/14/2005
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Verizon-MCI Deal May Affect Business Customers

Verizon's acquisition of MCI would create a strong telecom service provider with an extensive menu of services that can compete with the combined SBC-AT&T.

Verizon Communications said today it will acquire MCI Corp., the nation's second largest long-distance company, for more than $6.7 billion, creating a second large, full-service telecom company that can compete head-to-head with the SBC Communications-AT&T combination, which was announced two weeks ago. Executives heading up both Verizon and SBC have said their interest in selling more services to business customers was a driving factor behind the big acquisitions.

The Verizon deal beats out a larger bid for MCI made by Qwest Communications, a smaller regional Bell operating company. Verizon will pay $5.3 billion in stock and cash for MCI's shares and pay an additional $1.4 billion in dividends to MCI shareholders. Verizon also assumes around $4 billion in MCI debt.

The two companies have been talking about a deal since last summer, according to Verizon chairman and CEO Ivan Seidenberg. Talks accelerated once Qwest made a bid for MCI. But MCI, once known as WorldCom, ended up going with Verizon because it's a larger and financially stronger company, has a strong wireless operation, and has close relationships with many businesses in its service area, which includes Boston, New York, and Washington, D.C., analysts say.

The acquisitions will "produce great customer benefits," Seidenberg told investment analysts on a conference call. "We believe we can create a new way to think about going to market in the enterprise space. This is the right deal at the right time."

The acquisition combines Verizon's 6,600 local points of presence in 29 states, 53 million local-access lines, 3.6 million DSL customers, and a wireless network serving 43.8 million customers, with MCI's 4,500 points of presence on a global IP network that reaches into 2,800 cities in more than 140 countries. AT&T has around 3 million business customers; MCI has around 1 million.

Verizon officials say they expect to cut around 7,000 jobs once the deal wins regulatory approval in about a year. In addition, by combining the two companies' networks, Verizon expects to cut by more than $150 million annually the amount it needs to invest in its network. It also expects to save more than $100 million by moving traffic from Verizon customers onto MCI's network. Additional savings will come from consolidating and standardizing IT systems. MCI has 1,100 major IT systems, including 180 ordering systems, and Verizon expects to reduce those by 40% through IT reengineering, says Verizon CFO Doreen Toben.

MCI chairman and CEO Michael Capellas, who helped bring the company out of bankruptcy last year and clean up its balance sheet, said the combined company will be able to deliver one-stop shopping with a single point of contact for business customers. "All of the industry dynamics are changing," he told analysts. "We're moving to an IP world where everything is addressable." Capellas has been mentioned as a candidate to head up Hewlett-Packard in the wake of the firing of CEO Carly Fiorina.

After SBC agreed to buy AT&T for $16 billion, it became clear that MCI was "one of just a few beachfront properties left," Seidenberg said, and that Verizon needed to make a deal quickly if it wanted to be a major competitor in the market for business networks. Verizon "will compete where we have to on price," he said. But the goal is to create new services and bundles of services that "create new value and margins."

The consolidation of the telecom industry isn't over, analysts say. "I think we will see Qwest go away," possibly being acquired by BellSouth, says Ken McGee, a group VP and research fellow at Gartner. "BellSouth cannot simply stand by and do nothing."

The acquisitions of AT&T by SBC and MCI by Verizon are reducing competition for business networks and "we're entering a period where we might actually see rates rise again. Outside of the Big Two, there's no competitor out there that a Fortune 1000 company will move all of their traffic to. There's not a lot of competition out there for the large enterprise."

Business-technology managers need to implement a multivendor strategy and be prepared to move their business from one service provider to another if they aren't satisfied with the quality of service or the prices, he says. "But that will only be effective when a large enterprise truly means it when it says they will go to the other player," he says. "Unless they're willing to do that, they will not get everything they seek."

Verizon's move to buy MCI is good for competition because it strengthens a weak company, says David Willis, VP of technology research services at the Meta Group research firm. "It creates a much stronger battle between the big two," he says. "And there will still be many aggressive alternative carriers in the market to provide additional competition."

Willis also thinks there's a "natural pairing" between Qwest and BellSouth, the two remaining regional Bell operating companies. Sprint, which is turning itself into a predominately wireless company with its plans to buy Nextel Communications, is too big to be acquired, he says. "Sprint will remain a second or third option for business customers."

He isn't worried that SBC and Verizon will declare a truce and reduce competition. "AT&T and MCI competed on a national basis and their business customers expect that to continue," Willis says. "That will force Verizon and SBC to compete head-to-head for business customers."

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