Qwest Chief Touts Dangers Of Telecom Consolidation

Warns of a consolidated industry in which SBC and Verizon control most corporate business accounts and competition suffers.

February 24, 2005

4 Min Read
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DENVER (AP) Qwest Communications' chief is pitching his company's pursuit of MCI Inc., sketching an alternate scenario of a consolidated telecommunications industry in which behemoths SBC and Verizon control most corporate business accounts and competition suffers.

``What's happening here before our eyes, depending on what the government does, is that we're not consolidating -- we are concentrating market power, potentially,'' Qwest Chairman and CEO Dick Notebaert said in an interview Wednesday with The Associated Press, discussing the wave of telecom mergers since December.

``My concern, and I think the concern that the policy-makers should have, is that bigness does not equal better.''

Qwest is battling Verizon Communications as a suitor for MCI, which has accepted Verizon's $6.7 billion offer but faces pressure from some key shareholders to weigh the revised _ and more lucrative offer _ expected from Denver-based Qwest Communications International Inc. as soon as this week. Last week, MCI's board rejected Qwest's $8 billion bid in favor of a $6.7 billion offer from Verizon.

Notebaert declined to discuss the new bid _ which could come as early as this week. Qwest offers local telecommunications services in a 14-state region of the Midwest and West.San Antonio-based SBC Communications Corp. agreed last month to acquire AT&T Corp. for $16 billion, and Overland Park, Kan.-based Sprint Corp. plans to pay $35 billion for Nextel Communications Inc.

If the SBC-ATT and Verizon-MCI mergers were finalized, those two companies would have 80 percent of the market, including the lucrative enterprise sector of government and big business contracts, Notebaert said.

If the SBC-ATT merger were approved, the combined company would have about 44 percent of the business market, leaving Verizon as a standalone company with 21 percent, he said. A proposed MCI-Qwest merger would give that combined company 20 percent, he said.

``Instead of a two-legged stool that won't stand up you would have three suppliers out there of equivalent size that could compete,'' he said. ``From a public policy point of view, I think that's an issue. Sure, it's self-serving for us from a certain degree. But I really do worry ... if it goes down to two and they have 80 percent of market.''

The new Qwest bid is not expected to be much higher than its initial offer _ which was about $1 billion more than Verizon's offer _ but it likely will include a mechanism to protect the value of the stock at the time of closing, sources close to the situation said on condition of anonymity.Qwest expects the merger to generate at least $2 billion in annual synergies, some of which will be achieved through blending the two companies' fiber-optics networks, according to the sources.

While debt-laden Qwest is underfunded against cash-rich Verizon, some MCI shareholders are raising concerns about the Verizon deal. On Wednesday, hedge fund manager Elliott Associates LP, with 2.72 million shares of MCI, said it would oppose the Verizon-MCI merger, citing Qwest's richer offer.

``To accept a bid from Verizon that is 19 percent lower than the Qwest bid is difficult to understand,'' the company said in a letter to the board of Ashburn, Va.-based MCI. ``To have failed to explore an alternative form of the initial bid, in light of the substantial and continuing interest Qwest has shown in owning MCI, seems unjustifiable.''

Scott Cleland, chief executive of the independent research firm Precursor Group, said he did not believe the SBC-ATT and Verizon-MCI transactions would give the companies dominant market power, as Notebaert suggested.

``There's nothing antitrust against scale,'' he said. ``It's all about what effect it has on pricing, whether it's anticompetitive. These companies will be large but they're not going to be dominant.''Some analysts have suggested Verizon won over MCI because it is much more fiscally fit than Qwest, which has about $17 billion in debt, lacks a wireless division and faces increased competition from cable and high-speed data companies.

The Consumer Federation of America and the Consumers Union also weighed in with a letter to the Senate Judiciary Committee, saying they believe the Verizon-MCI merger would eliminate more competition than a potential Qwest-MCI proposal.

New York-based Verizon believes its proposed merger will pass antitrust scrutiny because the companies serve different markets, spokesman Eric Rabe said.

``In our view, there is not a competitor being eliminated here or a customer who is being disadvantaged by this,'' Rabe said.

MCI spokesman Peter Lucht declined comment on Elliott Associates or Qwest's revised bid.0

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