Unlike many other takeover fights, in which the auction ends because the target and the favored bidder lock-up the deal somehow or another, Qwest's quest for MCI has ended because Qwest is taking its ball and going home:
"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the company said in its statement. "Unfortunately, the latest in a string of decisions reconfirms what we have believed all along: that MCI never intended to negotiate in good faith with Qwest nor maximize shareowner value." (Link)
Granted, MCI has a poison pill in place, which doubtless discouraged Qwest from going hostile with a tender offer. If Qwest really wants MCI, and MCI's shareholders really prefer Qwest, however, there doesn't seem to be anything to preclude Qwest from pursuing a proxy contest-based acquisition plan. Qwest could launch an issue campaign to persuade MCI shareholders to vote down the Verizon deal and/or an election campaign at the next annual shareholders meeting to elect a new, presumably pro-Qwest, board. Depending on the provisions of the MCI article and bylaws, moreover, Qwest might even be able to call a special meeting or use written consents to remove the incumbent board. Finally, if Qwest really wanted to demonstrate shareholder support for its deal, it could make a tender offer that conditions closing on redemption of the poison pill. If the MCI shareholders really favor Qwest, they should be willing to tender on those terms, which would give us a sense of where the shareholders actually stand.
Given all of those choices, the decision by MCI's board to recommend shareholder approval of the Verizon offer doesn't have a ton of teeth. So why did Qwest quit? Opportunity costs? I doubt it, since if the Qwest deal really is all that great, the risks of losing the upcoming votes should be low.
Maybe what Qwest's decision to take its ball and go home tells us is that Qwest is less confident in its chances than is the market. After all, when MCI announced that it was going with Verizon:
"MCI's board noted that a large number of MCI's most important business customers had indicated that they prefer a transaction between MCI and Verizon rather than a transaction between MCI and Qwest," the company said.
"Additionally, as their contracts come up for renewal, a number of customers have also requested rights to terminate their arrangements with MCI in the event of a Qwest transaction," the company said. "These customer concerns, in the board's view, pose risks in connection with a Qwest transaction that could negatively impact the value of the equity stake in a combined Qwest/MCI to be received by MCI's shareholders under Qwest's offer."
Maybe Qwest has private confirmation of that information, which allows Qwest to more accurately assess its value than can the market. But my friend Prof. R. probably has a competing explanation.
Update: Larry replies:
The alternatives to a board-approved transaction PB suggests are costly – maybe amounting to at least the $4.00 premium the board was demanding. So they aren’t really alternatives at all.
I don't buy it. At $4 per MCI share, you'd be talking about something on the order of $1.5 billion. Surely Qwest could run a proxy contest for a lot less than that, although the costs admittedly would be higher if they also ran a conditional tender offer simultaneously.
In any event, my fallback position is this, as I put it to Larry in an email:
... if the market's right about Qwest's offer, Qwest could at least have hung around until the MCI-Verizon vote is put to the shareholders, watched it go down in flames, and then moved in to clean up.
Update: A reader who wishes to remain anonymous but works for a major law firm wrote:
Anyway, as someone who runs proxy fights and hostile tender offers for a living, you are correct that $1.5 billion is way, way high for what any possible contest for corporate control could cost. Even if you were to assume 1) a proxy fight againt the MCI/Verizon deal, 2) a proxy fight to elect nominees to the MCI board, 3) a tender offer conditioned upon pill redemption and board approval of the merger agreement and 4) all the litigation that would ensue, there is no way that goes over $100 million, and even that is very, very high--probably $50 million or so at the highest, really (and that's assuming it went on for many months).