Agency Problem

question 50

Essay

Agency Problem. In 2005, Qwest Communications International Inc. ended its pursuit of MCI Inc. While the Denver-based company had worked hard to win Virginia-based MCI, Qwest walk away from a bidding war with Verizon Communications Inc., a large New York-based phone company, when Qwest's increasingly expensive effort seemed futile. Ending a furious three-month bidding war, long-distance phone titan MCI turned down a $9.74 billion takeover offer from Qwest, a local and long-distance phone company, in favor of a $8.44 billion offer from the more financially secure Verizon. At the time, some of MCI's largest shareholders criticized MCI's board for taking the lower bid and urged Qwest to persist, but Qwest declined.
A. What is the potential agency problem at Qwest?
B. What is the source of agency problems within Qwest and similar companies?

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Definitions:

Trade-In Allowance

The value offered for an old item when it is traded for a new item, reducing the purchase price of the new item.

Book Value

Book Value refers to the net value of a company or an asset calculated by total assets minus intangible assets (patents, goodwill) and liabilities, used to estimate the value of a company on its balance sheet.

Commercial Substance

A characteristic of transactions that indicates a change in future cash flows as a result of economic activities, leading to a real economic impact.

Asset Improvements

Expenditures made to increase the useful life, efficiency, or productive capacity of an asset, typically capitalized and amortized over time.