WorldCom Makes $30-Billion Offer to Take Over MCI
WorldCom Inc., until recently a little-known purveyor of long-distance phone service, on Wednesday launched an audacious bid of nearly $30 billion for MCI Communications Corp.--a deal which, if completed, would be the largest corporate merger in U.S. history.
The bid appears likely to scuttle MCI’s agreement to be acquired by British Telecommunications. But it is sure to face intense scrutiny from MCI management and shareholders as well as regulatory hurdles in Washington.
A successful deal would establish WorldCom as the No. 2 player behind AT&T; Corp. in the fast-growing telecommunications industry. The new company would be able to provide local, long-distance and Internet services to retail and business customers in scores of markets across the country--making it a significant challenger to both AT&T; and the well-entrenched regional Bell telephone companies.
The telecommunications industry has undergone a wave of consolidations since Congress passed a broad deregulation law last year. The legislation was supposed to produce greater competition and lower prices, but to date it has mainly yielded a string of mega-deals--including the $22-billion merger of Bell Atlantic Corp. and Nynex Corp., and the $15.7-billion combination of SBC Communications Inc. and Pacific Telesis Group.
Wednesday’s dramatic offer attests to a continuing belief in the telecommunications business that size will be crucial in a coming period of global competition. And it confirms WorldCom’s solid standing on Wall Street, which has witnessed--and profited handsomely from--the firm’s astonishing growth through more than 40 acquisitions in five years.
“I wouldn’t want to be the man to bet against them,” said Gregory P. Miller, a telecommunications analyst for the securities firm Jefferies & Co. “This puts a collection of assets together on one grand scale. It will be years before you see another company with the ability to do this.”
WorldCom’s offer comes in the wake of British Telecom’s decision this summer to cut its own takeover offer for MCI from $21 billion to $17 billion after MCI warned of weak financial results. Few on Wall Street expect British Telecom to turn around and raise its bid to counter the WorldCom deal.
As of late Wednesday, Washington-based MCI had not formally replied to the WorldCom offer beyond issuing a statement that it would consider the bid “in due course.”
WorldCom Chairman and Chief Executive Bernard J. Ebbers said at a press conference that he had spoken by phone with MCI Chief Executive Bert C. Roberts Jr. earlier in the day, but he declined to detail what was said during the conversation.
As for the price, Ebbers said in public and in a letter to Roberts that WorldCom’s bid of $41.50 in WorldCom stock for each MCI share is worth “approximately $30 billion.” An MCI spokesman, however, said that company has 708 million shares outstanding, making the WorldCom bid worth $29.4 billion. WorldCom said it would assume another $4.5 billion in MCI debt as part of the deal.
Since its founding in 1983 as Long Distance Discount Services, WorldCom has grown into the fourth-largest long-distance phone company in the nation.
But it only won attention as a major player in the telecommunications industry last year, with its $12.5-billion purchase of MFS Communications Co. MFS was the provider of local telephone services to businesses in about 60 regional markets and was also the owner of UUNet Technologies, a major provider of Internet services.
Last month, WorldCom made another splash by purchasing CompuServe Inc., the online service, and then trading that company’s consumer subscribers for the Internet transmission operation of America Online Inc.
On Wednesday, in addition to the attention-grabbing MCI bid, WorldCom also announced the acquisition of Brooks Fiber Properties, a provider of local telephone services in about 40 markets, for $2.4 billion.
Those announcements, as well as earlier transactions, illustrate how WorldCom’s growing prominence has enabled it to exploit a financial resource that is better than greenbacks: its own stock. The company pays for its deals with its shares, which have soared in value by 56% in the last year alone as Wall Street continues to hold technology and telecommunications companies in high esteem.
“This is simply the 1990s writ large,” said Tom Burnett, founder of Merger Insight, a New York service that analyzes merger deals for institutional clients. “[Ebbers] has got a currency that means he doesn’t even have to write a check.”
The phenomenon has allowed aggressive companies like WorldCom “to expand geometrically in the blink of an eye,” Burnett said. But it also makes them particularly vulnerable to unexpected stock collapses, which would destroy their ability to finance their acquisitions.
Nevertheless, Wall Street displayed only muted fears of such a possibility on Wednesday. WorldCom shares fell only $1, to $34.48, in trading on the Nasdaq exchange, even though the MCI deal would require the company to roughly double the number of its outstanding shares.
MCI shares, meanwhile, rose $5.94, to close at $35.31 on the Nasdaq, and American depositary receipts of British Telecom rose $5.38, to $72 on the New York Stock Exchange.
Though losing MCI would throw a wrench into British Telecom’s strategic plans, the company could gain as much as $600 million in “break-up fees” from MCI, and would also enjoy a tidy profit on the 20% stake in MCI that it acquired for $4.3 billion in 1994.
Industry analysts in general accepted Ebbers’ contention that his company would be able to exact more than $1.2 billion in operational cost savings from a merger with MCI. Much of that, he said, would come from eliminating MCI’s need to pay as much as 40 cents of every long-distance revenue dollar as access fees to local phone companies.
In the 92 local markets where Brooks Fiber or MFS function as local carriers they--in other words, WorldCom itself--would get the access payments.
That marriage of local and long-distance assets is what makes the MCI deal a good one, Ebbers contended Wednesday.
“While MCI and British Telecom are both great companies,” he said, “the fit between them just doesn’t work without sufficient local network assets in place. Because WorldCom has those assets in place, far greater synergies are possible. It is clearly a superior fit and, as a result, a superior offer.”
Ebbers told analysts that another $2.4 billion to $5 billion a year could be saved through 2002 through economies in financing costs and operations.
Although those estimates are clearly optimistic, many industry analysts were inclined to accept them based on Ebbers’ record of delivering on his promises.
“Bernie Ebbers says what he means and means what he says,” said Raghu Ram, telecommunications analyst at Wheat First Butcher Singer in New York.
Others, however, noted that buying MCI would represent an unprecedented management and strategic challenge for WorldCom.
For one thing, the deal would outstrip all other merger deals in size, including the $23-billion merger of Nynex and Bell Atlantic made final this summer and the $25-billion acquisition of RJR Nabisco Inc. in 1989 by Kohlberg, Kravis & Roberts.
Moreover, the transaction would lead WorldCom into a market that Ebbers has long said he was inclined to avoid: residential service.
“MCI to a great degree is in retail telecom, and WorldCom has consistently said they don’t want to be in retail,” said Casey J. Alexander, an industry analyst at Gilford Securities in New York.
The deal also leaves WorldCom weak in one key communications technology: wireless.
“That’s their Achilles’ heel,” said Mark Winter, group vice president of worldwide telecommunications at IDC/LINK, a New York research firm.
Ebbers said he hoped to complete the MCI acquisition by the first quarter of 1998. It would, however, have to be examined by the Federal Communications Commission, which has the right to review the transfer of MCI’s communications licenses to WorldCom, and by the Justice Department, which would examine any antitrust issues raised by the merger.
Spokesmen for both agencies declined comment on the deal. But antitrust experts said the transaction is not likely to be blocked outright by federal regulators.
Although ownership of MCI and UUNet would give WorldCom control of more than 50% of the so-called Internet “backbone”--the trunk lines linking Web users coast to coast--that business also has numerous other strong competitors. WorldCom-MCI would also be a distant second in size to AT&T; in the long-distance market, and would face countless local phone service rivals.
Still, some communications experts expressed concern that the merger could greatly reduce competition in the booming market for Internet access.
That’s because the MCI deal would funnel $2.5 million in revenue and an additional 300,000 Internet subscribers to WorldCom’s Internet backbone, which is poised to also absorb 9 million America Online subscribers, 2.6 million CompuServe subscribers and hundreds of thousands of other subscribers from smaller Internet access providers that now use UUNet.
* COMPETITION ON HOLD? Advocacy groups say the deal isn’t likely to produce many benefits for consumers. D1
* INTERNET HOLY GRAIL: The deal could speed the merger of the traditional phone network and the Internet. D1
