TOPICS > Economy

WorldCom and MCI: Dial “M” for Merger

October 1, 1997 at 12:00 AM EDT
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KWAME HOLMAN: The little known WorldCom, Incorporated took much of the communications world by surprise today with its merely $30 billion bid to take over MCI. The deal would be the largest merger in U.S. corporate history. Headquartered in Jackson, Mississippi, WorldCom got its start in 1983, providing local and long distance telephone services. It went public in 1989, and in recent years the company has been on a buying binge, making more than 40 acquisitions in the last five years. Most of the recent additions to the company are related to Internet services. Perhaps because WorldCom customers mostly are corporations it has relatively low name recognition. Nonetheless, WorldCom now is the nation’s fourth largest long distance company and by far the largest phone company provider of Internet services.

VOICE: Welcome to CompuServe.

KWAME HOLMAN: Last month WorldCom acquired CompuServe, another Internet company, in a three-way deal with American Online. Industry observers said that purchase cemented WorldCom’s standing as a key player in the telecommunications industry. MCI, the target of WorldCom’s offer today, is the second largest long distance carrier behind AT&T and a long-time major player in the communications industry. Last year British Telecom, which already owns 20 percent of MCI, offered $21 billion to buy the entire company. That offer was lowered to about $17 billion after MCI projected falling earnings as a result of its effort to enter the local telephone business. At a news conference in New York today, WorldCom’s CEO, Bernard Ebbers, said his company’s proposal is better than British Telecom’s.

BERNARD EBBERS, CEO, WorldCom, Inc.: Today we are announcing that we are making a superior offer to the shareholders of MCI to merge with our company. Our offer is superior to BT’s offer. We are offering a higher price, a higher premium, and most importantly, a higher performing stock: price, premium, and performance.

KWAME HOLMAN: MCI said today its board of directors would review the unsolicited offer from WorldCom.

JIM LEHRER: Margaret Warner has more.

MARGARET WARNER: Now we get some analysis of WorldCom’s bid from David Roddy, chief telecommunications economist at the international consulting firm of Deloitte & Touche, and Eli Noam, director of the Columbia Institute for Tele-Information at Columbia University Business School. David Roddy, this is potentially a huge deal. What is it–why does WorldCom want MCI?

DAVID RODDY, Deloitte & Touche: Basically, what you have is the MCI shareholders are at a crossroads. They have a global potential with British Telecom, but they have a local potential with WorldCom. And it’s going to be a very complex unwinding to see which one they will choose. Now, the WorldCom/MCI combination has huge possibilities in the Internet.

MCI is one of the biggest backbone carriers of Internet traffic. And WorldCom has a lot of capabilities in that area as well. And, as you know, all of the video and audio and fax and data and sometimes even voice are all going to be going over the Internet network over the next five years. So there’s a huge local combination that WorldCom and MCI could take account of and produce synergies. And that’s one fork in the road. The other fork in the road would be with British Telecom and go globally where most of the economic growth in the world is going to happen and most of the telephone needs are going to be met over the next 10 years.

For example, half the people in the world have never made a phone call. So it’s an incredible choice: Do we go global, or do we go local?

MARGARET WARNER: But you’re saying that from WorldCom’s perspective, which doesn’t have the choice to make–they’ve made a choice here–and they see MCM less for its–we think of it as a traditional voice long distance carrier, but you’re saying they see it as an important fit for the Internet business.

DAVID RODDY: Absolutely. The fiber backbone capabilities that MCI has now and that they are working on would be a perfect match for the capabilities of U-Unet, which is a company that WorldCom owns and–

MARGARET WARNER: Which is a big Internet access provider.

DAVID RODDY: Exactly. And also the capabilities of the network that they just acquired from America Online–

MARGARET WARNER: All right.

DAVID RODDY: And they also have the combination of the local market facilities, which MCI has wanted to get into for a long time and is always fighting the Baby Bells on. WorldCom, through its MFS subsidiary, has lots of switches and fiber rings around cities on the U.S. to serve business markets. And that would be a great asset in the combination as well.

MARGARET WARNER: All right. Eli Noam, how do you analyze this, both from WorldCom’s perspective and the choice MCI has to make?

ELI NOAM, Columbia Institute for Tele-Information, Columbia University: It’s really a remarkable deal. This is the mouse that roared, that roared at the British lion. BT thought that they had the deal in the bag.

MARGARET WARNER: British Telecom. Yes.

ELI NOAM: Yes. And, in fact, they pushed the price down. Now, suddenly they might be left at the altar, standing there, when–whereas MCI is taking off with the guy on a motorcycle, taking off into the sunset. However, I’m not sure if any one of those are really the ideal deal for MCI. I think this will put MCI in play. There will be other suitors. And the most logical ones are the Baby Bells because there the complimentaries are quite high and the pockets are quite deep in contrast to WorldCom, which essentially has overexpanded so much in recent years, with so many deals, so many mergers. You just wonder how they can keep this ball in the air.

MARGARET WARNER: Just to explain to our viewers–I gather WorldCom has only valued itself at about $30 billion, and now they’re trying to acquire MCI for $30 billion. So you’re saying scale-wise it’s a huge bite for them.

ELI NOAM: This is a bit like Ben and Jerry trying to take over Proctor & Gamble.

MARGARET WARNER: But now staying with you for just a minute, do you agree, though, with David Roddy’s view that the reason WorldCom is doing this is as much for expanding its Internet capability, sort of betting on that side of the business, as opposed to the–to regular voice, telephone we think of as traditional?

ELI NOAM: WorldCom is already very strong in the Internet business, and I’m not sure if they truly need MCI. I think the motivation here is on some level good old empire building. It’s a large company. It will make them in the long distance field by far the second largest company. And I think that’s more important than the conservation of the Internet.

MARGARET WARNER: I see. David Roddy, you talked–you both talked about the choice. MCI has to make. Tell us, how does this get resolved? They’ve got two offers on the table. Or, there may be more.

DAVID RODDY: There may be more. That’s right. The basic idea is that this new revalued MCI-British Telecom deal would have to go before MCI’s shareholders anyway. And, undoubtedly, the WorldCom offer would be brought into that pot as well for decision making. Obviously, we’re going to expect some comment from British Telecom management, MCI management going forward after they’ve analyzed the possibilities.

But it is interesting to note that both British Telecom and MCI were up 6 points on the day and WorldCom was only down by a point, so it looks like the market is looking favorably at this particular deal. And keep in mind, British Telecom already owns 20 percent of MCI anyway. So they do make some money on the deal, although if their deal falls through, they will wind up with some cash but no business strategy going forward.

MARGARET WARNER: All right. But Eli Noam, if you’re on the MCI board and you have one offer worth not quite twice but a lot more than the other, is there a choice?

ELI NOAM: I would seek additional offers. I think they can do better than that still. The Baby Bells are still not committed to going to long distance, but that’s just a matter of a few months or a year or so. And if I would be MCI, I would probably hold off until there would be more bidding possibilities for me. Clearly, they’re willing to pay to the highest bidder at this point.

And I think that BT had the deal almost there, and I think they kind of may have overplayed their hand. They went and said the price is too high; we have to go lower. Now, they might be forced to increase the price, very embarrassing because they made such stronger argument why the old price had been so high, so they cannot climb off that limb easily. So I think they will have a hard time increasing, sweetening the deal by a lot, and maybe other companies will come in.

MARGARET WARNER: All right. David Roddy, what is the significance of all this from a consumer’s point of view?

DAVID RODDY: Well, that’s a great question because we’ve all been specializing in analyzing the demise of the Telecommunications Act of 1996 because this competition hasn’t shown up yet. As far as the WorldCom/MCI deal, that would increase local competition dramatically, in my view, and it would do that largely for small, medium, and large businesses in the major cities of the U.S., because that combination of MCI and WorldCom would then be able to control that business traffic and to end and effectively bypass the regional Bells.

So far we’ve had a lot of regulatory hassles and litigation that have stalled that entry, but if this merger were to go through, I think that there might be a lot more benefits for businesses in the near-term. On the consumer end I think we’re going to see a lot more activity on the Internet. And I think this combination would improve the technology quite a bit over the next year. And so we’re going to have faster and faster capabilities, whether they’re voice or video or audio, and create very exciting possibilities for the home computer in terms of entertainment and research.

MARGARET WARNER: Eli Noam, how do you see this from the consumer’s perspective?

ELI NOAM: Well, on some level it reduces competition and choice for consumers because the Number Two long distance company is merging with the Number Four. Now, it might make Number Two larger and more powerful than before, but there is one–the most feisty competitors, MCI and WorldCom are now becoming one company so there’s less–similar in local competition, of which there isn’t enough yet, so it’s kind of hard to know how this plays out, and certainly less competition in the Internet business, where the two were kind of relatively large and very aggressive competitors.

So I think there is a bit less competition there, but there are enough competitors around, so it doesn’t really make a big difference, but I don’t see any particular net gain for consumers.

MARGARET WARNER: All right. Well, thank you, Mr. Noam and Mr. Roddy. Thanks very much.

DAVID RODDY: My pleasure.