Mci Takeover Battle

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Team D & D

Team D & D

Background
Worldcom/ MCI is going through a restructuring effort after their bankruptcy filing and the surviving company is called MCI. Fresh round of shares are issued and previous debt has been settled.
Why MCI is a target? * Most extensive communications network in the world with a customer base in 200 countries * One of the most extensive Internet Protocol backbones and the largest carrier of international voice traffic * Least debt in phone industry ($6b) in the industry through restructuring process following bankruptcy * $5b cash in bank * Market trends indicated that the market will move towards broadband, therefore MCI was a prime target for acquisition. * MCI had
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Verizon has the available cash to provide $8.5 per share of MCI stock | Debt (millions) | $35674 | $17290 | Qwest is offering $3.35B for the cash portion whereas they only have 1.77B cash on hand. This means they have to take more debt and given their performance and current debt rating, they will pay higher interest. | Net Income (millions) | $7831 | (1,706) | Verizon has a positive net income when compared to negative that of Qwest | Market to Book Ratio | 2.99 | (3.09) | This shows that the liabilities of Qwest are higher than its assets and therefore, results in a neg P/B ratio. | ROE | 7% | -22% | Verizon has a better ROE and seems to cover the cost of capital. | Market Cap (millions) | $96560 | $6890 | Qwest has 2.5 times more debt than their market cap. |
Table 2: Financial and performance snap shot
Recommendation:
Based on Table 2 summary, Verizon definitely has a better financial and economic outlook with positive earnings and A+ debt rating. They can further sweeten the deal by taking away the discount (1.1%) from the current bid even though the current offer should be good enough for the nervous MCI shareholders
Qwest has also been under SEC investigation of 2002 in which Qwest fraudulently recognized $3.8B in revenue and excluded $231M in expenses as part of multi-faceted scheme

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