Nearly one year after British Telecommunications plc and MCI Communications Corp. announced plans to merge, MCI last week terminated the agreement and accepted a $37 billion stock offer to merge with WorldCom Inc.
The agreement, which is subject to approvals from the Federal Communications Commission, the Justice Department, other state governments and MCI and WorldCom stockholders, would reportedly be the largest corporate merger in U.S. history.
WorldCom originally offered MCI about $30 billion, or $41.50 per share, but later sweetened the offer. The new arrangement calls for MCI stockholders to receive $51 of WorldCom common stock for each MCI share.
The three companies also reached an agreement calling for BT to sell back its 20-percent interest in MCI for $7 billion, or $51 per share, in cash. BT will receive a $465 million break-up fee.
By accepting WorldCom’s offer, MCI closed the door on an all-cash offer from GTE Corp., which would have given MCI wireless facilities, a goal the company appears to have strived for since selling its wireless interests a decade ago.
“That’s always been something of a problem for MCI,” said Dr. Joseph Kraemer, managing director of communications and electronics consulting at A.T. Kearney, who said wireless service may not mesh with WorldCom’s core business strategy.
“If you’re focused on business, wireless has always been sort of vague. You can sell corporate accounts for wireless but they’re probably used 50-50 for personal use,” he said. “It could very well be that WorldCom will undervalue wireless.”
Asked what the combined company’s plans in the wireless arena include, Bernard Ebbers, president and chief executive officer of WorldCom said, “Well, we won’t be deploying it. At the appropriate time we may look at acquiring it. We may look at reselling it.”
MCI is the nation’s largest wireless reseller, and WorldCom has a handful of resale agreements.
Joking that MCI has always stood for More Changes Imminent, Bert Roberts, chairman of MCI, said besides long distance, the company’s focuses have been- and continue to be-local service, Internet and the international arena.
Although MCI and WorldCom’s entrepreneurial management cultures may be more compatible than MCI and GTE’s management cultures, Kraemer said WorldCom may have difficulty dealing with MCI’s residential business.
“I think the success of WorldCom has been to avoid getting mired in the residential side of things, which is something MCI has done very well,” said Kraemer. “Everybody’s analysis is that WorldCom, which has done very, very well with an acquisition process that’s focused on business, is now about to take on a huge consumer business that is costly and very much like a commodity.
“WorldCom has chowed down, sort of like a dog chasing a car and all of a sudden he clamps his teeth on the bumper, and it’s going downhill at 40 miles per hour. Suddenly it dawns on you that your little feet are starting to smoke,” said Kraemer. “In two years, when they sit down to write their end- of-1999 perspective, I think the critical issue will be the consumer business of MCI-did that turn out to be a quagmire for WorldCom?”
MCI’s stock jumped nearly $5 per share following news of the agreement, closing at $41.50 Nov. 10. WorldCom’s stock dropped more than $2 to close at $31 that day and fell again to close at $28.90 Nov. 12.
Standard & Poor’s revised the CreditWatch implications of MCI Communications Corp.’s ratings to negative from developing as a result of the announcement. WorldCom’s ratings remain on CreditWatch with positive implications, said the ratings firm.
Standard & Poor’s also announced the AAA long-term senior unsecured and corporate credit ratings on BT will remain on CreditWatch where they were placed last November when the company and MCI announced intentions to merge.
BT will retain control of Concert Communications Services, its joint venture with MCI. BT owns 75.1 percent of the venture and has a call option on the 24.9 percent owned by MCI, said the company.
With WorldCom and MCI toasting their new alliance, the question of what GTE might do next is raised.
“Basically, our prediction has always been that we’ll end up with three or four huge consortia-like operations,” said Kraemer. “GTE cannot be out there by themselves.”
Kraemer said GTE could look to pair up with BT, although he said BT would be more likely to first consider a merger with Bell Atlantic Corp., which carries much of the North Atlantic traffic, or BellSouth Corp., which has a significant presence in Latin America. Another possible combination would be with AT&T Corp.
