The news came in the form of a letter from the General Services Administration, which had launched a review of Qwest’s government contracts in 2002. The GSA review was sparked by the indictment of four former Qwest employees in connection with a 2001 sale of services and equipment to Arizona schools that improperly inflated Qwest’s revenues in order to make it appear Qwest was meeting its ambitious quarterly growth targets.
MCI was thought to have turned down Denver, Colorado-based Qwest’s offer despite it being 19% higher than Verizon’s offer because of concerns about Qwest’s $17bn debt pile, its balance sheet, and the fact that its shares were less attractive than that of New York-based Verizon.
Another concern was thought to be the possibility that Qwest could lose the right to contract with the US government. Government contracts do not make up a large part of Qwest’s business, but for MCI government contracts are thought to bring in more than $1bn out of MCI’s total revenue of $21bn.
Meanwhile, the market waits to see when Qwest will file a renewed bid for MCI. The new bid is likely to have a similar value to previous $8bn cash and stock offer, but could include more cash and less stock, as well as a mechanism that would protect MCI shareholders from getting less than promised if the value of Qwest’s stock dropped between the time a deal was reached and when the merger closed.
The uncertainty surrounding MCI has also affected its reporting schedule, after the Ashburn, Virginia-based operator delayed reporting its fourth quarter and full-year 2004 financial results until the end of this week. The results had been expected today.
