How Much Exclusivity is Enough?

By on / Business Negotiations

On February 14, 2005, telecommunications giant Verizon announced that it would buy MCI for $6.75 billion in cash and Verizon stock.

The announcement followed closely on the heels of two other announcements of big telecom mergers: first Sprint and Nextel, then AT&T and SBC Communications. In light of this rapid industry consolidation, only one player would be stranded without a partner: tiny Qwest Communications, whose market capitalization was less than one-fifth that of any of its soon-to-be-merged competitors.

No suprise, then, that Qwest announced an unsolicited, $8 billion cash-and-stock offer for MCI two weeks after the Verizon deal was announced. Analysts believed the deal was attractive to Verizon but necessary for Qwest, which was desperate not to be left standing on its own. The bidding escalated through the winter and spring of this year, finally ending in May 2005 with an $8.4 billion offer from Verizon – roughly a 25% increase from its initial deal.

Notably, Verizon got less exclusivity than it might otherwise have in its initial deal with MCI.

MCI agreed to a standard no-shop provision that prevented it from seeking other bidders. Furthermore, MCI agreed to a $240 million breakup fee.

Yet the initial deal did not include a standard stock-option lockup, which would have given Verizon additional deal protection if a third-party bidder such as Qwest came along. It’s plausible that Verizon did request a stock option lockup and that MCI refused in the hope of fueling a bidding war. Given Qwest’s “desperation” to acquire MCI, it’s not clear that greater exclusivity would have called off the contest, but it certainly would have given Verizon a leg up. By allowing Qwest to enter the playing field, MCI was able to run an auction and extract full value from the eventual winner.

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