World Com Together
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PHIL PONCE: Last month when WorldCom, Inc. first made a $30 billion bid to buy phone giant MCI, WorldCom was not exactly a household name. But today it was announced WorldCom sweetened its offer to $37 billion and MCI had said yes. Now, the little-known Mississippi company could make history for causing the largest corporate merger in U.S. history. Headquartered in Jackson, Mississippi, WorldCom got its start in 1983, selling long distance service at a discount. WorldCom went public in 1989 and in the past five years has acquired more than 40 companies. The most recent additions relate to the Internet, including WorldCom’s acquisition of CompuServe. Some industry observers say the purchase of CompuServe put WorldCom on the map as a key player in telecommunications. WorldCom is already the nation’s fourth largest long distance company and by far the largest phone company provider of Internet services. But MCI would be WorldCom’s biggest catch. MCI’s the second largest long distance carrier behind only AT&T. MCI had other corporate suitors, including British Telecom and GTE, but MCI said no to both. Is WorldCom’s hunger for acquisitions now satisfied?
BERNARD EBBERS, CEO, WorldCom, Inc.: Entrepreneurs are, by nature, people that look for opportunities. Both MCI’s senior management and the WorldCom senior management. If there are opportunities out there that make sense, we certainly won’t shy away from it.
PHIL PONCE: If today’s deal is approved by federal regulators, the new company will be called MCI/WorldCom. With us now is Joshua Cooper Ramo, a senior editor at Time Magazine who covers technology and business. Mr. Ramo, welcome. And if this merger is approved, what kind of a company would this be in terms of the services that it offers to its customers?
JOSHUA COOPER RAMO, Time Magazine: I think it’s going to be a remarkable company that emerges. You can’t really underestimate the amount of change that’s going on in the telecommunications business. When WorldCom got its start back in 1983, the idea of competing against a monopoly like AT&T just seemed ridiculous. They had dominant market share. They had 99 percent of the U.S. households connected for long distance service. The notion that you could move in that space and do something competitive was an idea that was really radical for its time. Here we are 15 years later and Ebbers has built a company which is going to be a very real competitor to AT&T.
PHIL PONCE: You’re talking about Mr. Ebbers, the head of WorldCom.
JOSHUA COOPER RAMO: Yes, that’s right. What you’re going to see, I think, from the combined company is not only incredible strength in the long distance business but also aggressive moves into local telephony. They’ll have about a hundred different cities that they’re going to be able to start with but, most importantly, a recognition that data traffic is going to be the real revenue key in the future. In 1995, the amount of data traffic on the world’s networks passed the amount of voice traffic. That’s something that’s never going to go back. And the companies that are going to profit from that are the companies that are well positioned technologically to take advantage of that. This merged company is a perfect example of the kind of organization you want.
PHIL PONCE: So when one industry observer said that this is the–this is sort of the prototype of the telecommunications company in the future, that person was not overstating that.
JOSHUA COOPER RAMO: No, not at all. Prototypical, interestingly, in a variety of ways. Probably the first way is by having this ability to recognize these lightning fast changes in the business. AT&T ran its business for 40 years without changing very much. What these new guys bring to the party is a recognition that change is an opportunity to really build empire. And so in that sound clip you just played from Ebbers he was saying entrepreneurs look for new opportunities. And phone companies of the future are not going to be big, staid, solid structures. They’re going to be things which are changing over and over again. So that’s the first important point; that change is a key element here. The second one is that the nature of that the kinds of services that phone companies are going to provide is changing very radically. Five years ago phone companies were mostly in the business of providing voice communications. Five years from now your telephone company is going to be providing everything from data communications to electronic commerce to movies on demand. And Ebbers is absolutely right in believing that this company’s structure is the prototypical structure to make a lot of money in that world.
PHIL PONCE: Right. Now, how many companies are out there that provide local service, long distance service, hookups to the Internet?
JOSHUA COOPER RAMO: Well, this is actually one of the fascinating things about this deal. One analyst down on Wall Street has estimated that there are roughly 150 times the amount of capacity in the year 2010 than is going to be necessary of all of these phone companies that are out there–and there are literally hundreds of them–continue to stay in business. What Ebbers has recognized and he recognized it since he started a small company called LDDS at the diner, the local diner in Jackson, Mississippi, in 1983, is that size is an important ingredient here, so though there are hundreds of companies that are competing in this space, they really believe that by creating something that’s vertically integrated they’re going to be able to move a lot more aggressively than some of these small players.
PHIL PONCE: Both British Telecom and GTE wanted to buy MCI. Why did MCI say yes to WorldCom?
JOSHUA COOPER RAMO: I think that’s a fascinating question. A year ago or so when the MCI-BT discussions began, you would talk to these guys from MCI. And what they were the most excited about was the possibility that this was going to give them this global reach. I remember talking to somebody who’d just come back from pitching the government of Paraguay, and they said Paraguay is going to buy all of its phone services from Concert, which was the name of the combined BT-MCI organization. What MCI’s board apparently seems to have decided is that mastering the technology for a global communications company is more important than merging with a company that has a lot of global outposts. What WorldCom has is undisputed leadership in the business of providing end-to-end connectivity for data transmission. By merging that with MCI’s very broad customer base they believe they’ll be able to go global.
PHIL PONCE: Mr. Ramo, you pointed out–you alluded to the fact that in 1983 Ebbers and his–the other people who started WorldCom were sitting in around in Day’s Inn in Hattiesburg, Mississippi. Where do these guys come from in that relatively short period of time?
JOSHUA COOPER RAMO: Absolutely. It is really one of the great business stories of the age. I mean, one of the things we hear all the time is, you know, we’re living in this–this period of warp speed change, and companies have got to learn to take advantage of it. What Ebbers was able to do was really focus very quickly on where exactly changes were occurring in the telecommunications business and then target his acquisitions very precisely to make sure that they were timed in such a way that the revenues they would get from those deals would be able to vault them to the next levels. Of course, the famous statistic you hear about WorldCom is that it’s delivered 53 percent annual growth to shareholders. If you’d invested $10,000 in WorldCom five years ago, it would be worth $75,000 today. Where these guys came from was an implicit realization that they could grow the company by acquiring the right businesses at the right time. The joke on Wall Street is that WorldCom is the ultimate proof that you can build a company by starting with more investment bankers than customers.
PHIL PONCE: In spite of the fact that it’s made all this money, I mean, does it have $37 billion in cash that it can hand over to the MCI board?
JOSHUA COOPER RAMO: It has a variety of things that it’s doing with the deal structure and one of the things we’ve not yet seen fully played out is the details of how this structure is going to emerge. We have some questions about goodwill and accounting things that are going to have to emerge. But what WorldCom does have is a track record of being able to structure deals in such a way so that they can make them happen. And if you talk to people on Wall Street right now, what they say is that Ebbers is not finished by a long shot. He’s not only confident he can pay for this but pay for the kinds of deals that will drive his company forward into the future.
PHIL PONCE: That’ll have to be the final thought, Mr. Ramo. I thank you.
JOSHUA COOPER RAMO: Thank you.