Knight Ridder Newspapers

PHILADELPHIA – Verizon Communications Inc., which began its life as two of the companies spawned by the breakup of the Bell system 21 years ago, Monday agreed to buy MCI Inc., the company that helped instigate the breakup.

Various observers pronounced the deal beneficial for the two companies and their shareholders, probably good for their corporate customers and potentially troublesome for consumers.

It will certainly be bad news for about 3 percent of the 250,000 people who work for MCI and Verizon. Executives of the companies told Wall Street analysts the merger should allow the elimination of about 7,000 jobs.

With a complex financial package valued Monday at about $6.7 billion, Verizon won a bidding skirmish for MCI against another former Baby Bell, Qwest Communications International Inc. Verizon bid about $500 million less for MCI than Qwest, but prevailed because of its superior financial strength, analysts said.

Together, the two companies will be able to offer wireless voice and data services from Verizon, a nationwide high-speed voice and data network from MCI and the requisite size to fund development of technology to deliver future communications products.

Those same qualities were said to be behind last month’s proposed purchase of AT&T Corp. by SBC Communications Inc.

But with each new merger, the competitive forces that could drive consumers” prices lower are diminished, said Janee Briesemeister, senior policy analyst at the Consumers Union, publisher of Consumer Reports.

“These mergers might satisfy Wall Street, but they will hurt Main Street,” she said.

Communications savings for consumers in recent years have been confined to wireless services and long-distance services, she noted. And the greatest savings have gone to consumers who can afford to buy “bundles” of communications products, such as wireless service, long-distance, and high-speed Internet access, along with their basic phone service.

Since 1997, costs for wireless and long-distance services have declined by 29 percent and 30 percent, respectively, while the cost of basic phone service has climbed by more than 23 percent, according to the Bureau of Labor Statistics.

“Consumers will have to spend more on high-end packages in order to have any type of choice in the future,” Briesemeister said.

The three recent mergers would reduce the U.S. telecommunications industry to five dominant players – Verizon, SBC, BellSouth Corp., Sprint and Qwest – though the cable-TV industry has begun to emerge as a serious threat on the consumer side with the accelerating rollout of telephone service.

However, cable operators and other providers of local-phone service using Internet technology can serve only those customers who already have or are willing to buy high-speed, or broadband, access to the Internet.

“The so-called options to traditional phone service, such as wireless and broadband, are controlled by the same companies,” Briesemeister said. “For example, SBC and Verizon are owners of the two largest wireless companies, Cingular and Verizon Wireless, as well as major providers of broadband.”

Verizon spokesman Eric Rabe said the Verizon-MCI deal has nothing to do with the forces driving local-phone prices higher. Verizon’s basic rates have been flat for years he said, but overall local-phone costs have climbed as costs that used to be borne by long-distance carriers for access to local-phone networks have been shifted to local-phone customers.

“It’s indeed a problem that does need to be fixed,” he said. But it’s “completely unrelated to this merger.”

On Wall Street, reports of a possible Verizon-MCI deal emerged last week in the wake of the SBC-AT&T announcement in January and the Sprint-Nextel deal announced in December.

But Verizon’s chairman and chief executive, Ivan Seidenberg, said talks between the two companies had been under way before the SBC announcement. And, he said, they were driven not by a “me, too” strategy, but by a desire to add assets that could speed Verizon’s growth and entry into new markets.

In such an environment, he told analysts Monday, “MCI is one of just a few beachfront properties you’d want to see.”

The deal is subject to MCI shareholder approval and requires regulatory approval, which the companies hope to get in about a year.

Verizon was created by the merger in 1997 of Bell Atlantic Corp., the regional phone company based in Philadelphia, and Nynex, which served New York and New England from New York City. Both were among the seven original “Baby Bells,” the regional phone companies created in 1984 by the breakup of AT&T’s Bell System.

That breakup was the result of an agreement between AT&T and the Justice Department, which pursued a lengthy antitrust case against the company after it was accused by MCI of engaging in anti-competitive practices.

MCI was acquired by WorldCom in 1997. In 2002, the Securities and Exchange Commission began an investigation of WorldCom after an internal audit discovered the company’s assets had been greatly overstated. WorldCom’s former chief executive, Bernard Ebbers, 63, is on trial in Manhattan federal court on charges of securities fraud, conspiracy and filing false statements to the SEC. He faces up to 25 years in prison if convicted.