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Déjà Vu MCI to Qwest International Inc: Can this Corporate Marriage Survive?

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Current Situation:

As of this writing, the MCI Board of Governors has given Verizon Communications Inc. one week to sweeten their $7.5 billion offer, otherwise they have no choice but to accept Qwest Communications’ $9.74 billion offer to purchase MCI Inc. If the Board does not receive a counter offer from Verizon Communications by May 3, 2005, then it will recommend its shareholders vote for Qwest’s offer. From all accounts (Noguchi Washington Post, 4/24/2005), Verizon is a stronger and more stable company with $71.3 billion versus $13.8 in 2004 revenue, 210,000 employees versus 42,000. Qwest carries more than $17 billion in debt and it plans to reduce its costs by $15 billion by cutting 15,000 employees after the merger while Verizon plans to cut about 7,000 jobs.

The Problem:

The question is: Can Qwest Communications break all rules of successful mergers and still survive? The driving force behind Qwest’s acquisition is the 60-70 percent of MCI shareholders, which consists of hedge fund investors (a group of super rich investors) with a strong interest in quick return on their investments. Since MCI just came out of bankruptcy, the bank creditors are not going to benefit with Qwest’s plan to cut 17,000 jobs and it is going to be very difficult to keep key employees. When key employees depart for other companies it is highly likely that customer service will suffer leading many of them to change their service providers. It is also feasible that Verizon could use its financial resources to build new networks to attract MCI’s corporate customers located in the Northeast region where it does business.

Déjà Vu:

MCI has been here before. The year was 1997 and British Telecom (BT) was ready to acquire MCI for $21 billion. Then BT discovered a discrepancy in MCI’s accounting and reduced its offer to $17 billion. Bernard Ebbers, at the time the Chief Executive of WorldCom stepped in and offered about $31 billion all in stocks. At the time, BT was in the same position that Verizon is currently—very stable and debt light. It appears that history is repeating itself. During the late 1990s and early 2000, several dotcom businesses failed because they did not follow proven business models. They thumbed their noses at well-established and functioning business practices.

Merger strategy and post merger integration:

Those contemplating the merger of Qwest and MCI must know something that the experts of mergers and acquisition do not know. Qwest needs MCI to expand its long distance business and to grow. They see a synergy between the two organizations. However, they fail to admit that the major investors are in it for the quick return on their investments. It has been widely reported that 60-80 percent of mergers and acquisitions fail. This is due in part to inattention to post merger integration of two corporate cultures, loss of key employees, and inability to meet customer needs. In addition, by the time the merger is approved by the regulatory bodies, the competition can develop their own strategies to negate any possible impacts of the merger to their business.

The result is the buyer ends up losing. No other organization has been able to survive without adherence to most of the basic principles of organizational change management. Who knows, the leaders of Qwest Communications may have some creative ways to make this corporate marriage work. I wish them all the best. “Those who cannot remember the past are condemned to repeat it” George Santayana (1863-1952) Reason in Common Sense.

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