May 02, 2005
MCI v. Efficient Market Hypothesis
Posted by Christine Hurt

While I was at the dentist's office, MCI decided to stick with the increased $26 Verizon bid over the Qwest $30 bid.  (Prof. Ribstein's take is here.  I am also eager to see how any resulting litigation plays out.)  Either the MCI board was schooled in "new math" or the efficient market hypothesis is not getting any respect here.

I understand that the ECMH is complex and that believing simply that the share price of a heavily traded publicly-held corporation reflects the fundamental value of that share may be a bit naive, but what can the MCI board know that nobody else on Wall Street knows about the value of Qwest shares?  The board points to weaknesses in Qwest's capital structure and industry risk, but surely the market has taken some of that into account by now.  Theoretically, the market could value Qwest perfectly and Verizon perfectly, but the board believes that the combined [MCI + Verizon] is over $4/share greater than the combined [MCI + Qwest], even with Qwest's price protection.  But even that difference, discounted by the probability of the merger happening, would be somewhat factored into the share prices of Qwest and Verizon at this point. 

I'm not a true believer in the ECMH, but I always like to see when other people act as if they aren't either.

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