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Consumer Groups Call for Hearings on Telecom Merger Wave

February 23, 2005
Mark Cooper (301) 384-2204
Gene Kimmelman (202) 462-6262
Washington, D.C., February 23, 2005 – Citing the acceptance of a lower bid and the unique competitive threat of the proposed Verizon-MCI merger, two of the nation’s largest consumer groups sent the following letter to the Senate Judiciary Committee calling for immediate investigations into the merger wave in the telecommunications industry.
February 23, 2005
Arlen Specter, Chairman Judiciary Committee
Patrick Leahy, Ranking Member, Judiciary Committee
Michael DeWine, Chairman, Antitrust, Competition and Consumer Rights Subcommittee
Herbert Kohl, Ranking Member Antitrust, Competition and Consumer Rights Subcommittee
United States Senate
Dear Senators,
Senators DeWine and Kohl recently stated that the merger wave in the telecommunications industry demands close scrutiny.1 We are writing to urge you to move with the utmost speed on that undertaking.
As a general matter, consumer advocates do not take sides in merger bidding wars. The practice is to let management and shareholders pursue the maximization of their private values and then to comment on the implications of the merger for the public interest. In this case, however, neither policymakers, nor consumers can afford to wait to scrutinize these developments.
As Senators DeWine and Kohl pointed out, “the proposed merger among Verizon and MCI is another major step in the ongoing consolidation of the telecom industry… This bundling and the ongoing consolidation continue to raise troubling questions about competition and the availability of consumer choice.2 But, the decision of MCI’s board to accept a substantially lower bid from Verizon than was made by Qwest raises an especially large red flag.
In a stunning reversal,3 after complaining that Qwest’s offer might not have a large enough premium,4 the board then accepted an offer that values Verizon’s stock at a premium of more than 20 percent to its current market price.5 What is it that led the MCI board to place such a high value on Verizon’s stock? Even some of its stockholders are scratching their heads.6
The acquiring firm will claim that there are synergies, but there is a more likely answer that should be a concern to the Judiciary Committee: market power. Across a number of product and geographic markets a Verizon-MCI merger eliminates a great deal more competition than would a Qwest-MCI deal. For example, MCI has a much larger presence in the residential market in Verizon’s territory than Qwest’s. Verizon is much more likely to meet MCI head-on in the enterprise market than it is likely to meet Qwest. The vertical integration of Internet backbone facilities into Verizon poses a much greater competitive threat. We are of course not supporting a Qwest-MCI merger, but pointing out that such a merger raises fewer competitive concerns.
Qwest-MCI would be a national, full-service company with a weak regional base that would have to compete outside of its region; Verizon-MCI would be a dominant regional company, whose primary focus would be on solidifying its market power within its region. As the smallest of the regional companies, Qwest has pursued a much more competitive strategy, for example, selling naked DSL — a high speed Internet connection not “tied” to Qwest’s local or long distance service – and signing contracts with competitive local exchange carriers. From the point of view of consumers and public policy, there may be a substantial difference between the two outcomes.
Press accounts bear this fundamental difference out. On February 4, the Wall Street Journal described Verizon and MCI as follows: “A tie-up between Verizon and MCI also could face cultural challenges: The companies have been fierce competitors and have been at loggerheads in court.”7 In contrast, on the same day the Washington Post described a Qwest-MCI union as a product and geographic market extension merger as follows: “MCI’s most valuable asset is its base of business customers, which requires a network that can transport voice and Internet traffic around big cities. But Qwest’s local phone network does not connect to many of those areas.”8 Similarly, on the same day, the New York Times described a Qwest-MCI merger as a product extension merger as follows: “Merging with MCI would give Qwest hundreds of new large business customers, which will be crucial to its growth. And joining with MCI could help Qwest add voice and data traffic to its wholesale network business.”9
These concerns about market power are just as great or greater in the SBC-ATT merger, but the premium flip-flop in the Verizon-MCI deal clearly highlights how management has valued monopolistic gains over competitive value to the detriment of consumers and competition. Each of these mergers demands careful scrutiny. Moreover, because both are pending, the antitrust authorities and regulatory agencies must consider the overall, highly concentrated industry structure that will result.
Throughout the years since the Telecommunications Act of 1996 was passed, we have repeatedly witnessed a troubling phenomenon. Just at the moment that competition started to develop in some market, because large players feel the need to enter new product or geographic markets, they decide to expand by merger rather than compete for customers. Antitrust authorities and regulators must now take a broader view of the industry structure and this Committee should send a clear signal that maximum competition is paramount.
While it might be considered somewhat early for the Committee to hold hearings while the deal making is not done, the collapse of local competition and the reintegration of local and long distance poses an extraordinary challenge to the policy framework the Congress set for the industry in the Telecommunications Act. We believe that competition policy and the public interest require the Committee to exercise its oversight authority immediately to ensure that the benefits of telecommunications competition do not disappear in a frenzy of industry consolidation.
Mark Cooper
Director of Research
Consumer Federation of America
Gene Kimmelman
Senior Director of Public Policy and Advocacy
Consumers Union
1 Senators Dewing, Kohl Issue Statement Regarding Proposed Merger Between Verizon, MCI, February 14, 2005.
2 Id.
3 Press accounts expected the opposite. For example, the Wall Street Journal reported “Verizon, a local-phone and wireless giant with a market capitalization of nearly $100 billion, could offer more cash than Qwest or even a stock premium to MCI shareholders (Almar Latour and Dennis K, Berman, “Qwest Plays Field As MCI Gets Coy on Deal Proposal,” Wall Street Journal, February 7, 2005. The accepted bid alternative was smaller on both accounts.
4 Gregory Zuckerman, “MCI Holders Aren’t Jumping at Bid,” Wall Street Journal, February 9, 2005.
5 Yuki Noguchi and Ben White, “Qwest Plans to Revise Bid for MCI,” Washington Post, February 18, 2005, E-1, reports an $8 billion Qwest bid and a $6.75 billion Verizon bid. The difference in value is equal to 19 percent of the value of the stock offered in the transaction. Qwest’s bid also offers more cash, equal to 40 percent of the value of MCI’s stock offered, which suggests a substantial premium in terms of the time value of money. Almar Latour, “Qwest Sets Its Sights Anew on MCI,” Wall Street Journal, February 22, 2005, A-3, cites the 19 percent figure as well.
6 Almar Latour, “Qwest Sets Its Sights Anew on MCI,” Wall Street Journal, February 22, 2005, A-3, notes “At least four shareholder lawsuits have been filed against MCI in the wake of its agreement to accept the lower off from Verizon.”
7 Almar Latour and Dennis K. Berman, “Qwest Presses Its Bid for MCI,” Wall Street Journal, February 4, 2005, C-4.
8 Yuki Noguchi and Ben White, “MCI, Qwest in Advanced Discussion,” Washington Post, February 4, 2005, E-5. While the article sees this as a constraint on cost saving, it ignores the competitive implications of a purely geographic extension merger.
9 Ken Belson and Matt Richtel, “For MCI, Qwest May Not be Most Desirable,” New York Times, February 4, 2005, C-12.