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Thursday, March 10, 2005

Fast Money, MCI, and Efficient Markets

Wednesday's Wall Street Journal has yet another story on the MCI takover. It says,

The fight for MCI hasn't just pitted Qwest against Verizon. It has set MCI's shareholders -- made up disproportionately of the fast-money, deal-playing, stock-flipping crowd -- against MCI's board, which claims to be interested in the "long term."

...After shareholders revolted, MCI's board relented and agreed to reassess the Qwest offer by March 17. In initially going with the Verizon offer, the board effectively was saying it knew more than the market. Over the long term, the board's actions said, the initially offered $24.60 from Qwest wasn't worth as much as the initially offered $20.75 from Verizon because MCI's overseers thought that shares of the heavily indebted, competitively constrained Qwest were too risky.

Click here for the whole article (note: online subscription required).

Under efficient markets theory, each bidder's stock' price is an accurate reflection of it's value, regardless of how long MCI's shareholders hold their shares. However, the board of MCI believes it knows better than the market. It talks about "long-term" shareholders versus those that want a fast return.

Of course, if markets are efficient, the current price reflects both the short and long term prospects.

An alternate story to explain MCI's board's preference for Verizon's offer is the existence of an agency problem with the board. If Qwest has riskier operations than Verizon, it could run up against the board's risk preferences (both their continued empoloyment and their reputations). Alternately, it could have negative consequences for other stakeholders of MCI, such as employees.

Questions for classroom discussion: Should MCI's board have accepted the Qwest offer? How likely is it that MCI's board has better information than the market regarding Qwest's value? Are there other reasons (i.e. agency problems) that could make the board prefer the Verizon offer? How would you interpret these rationales?


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