SIGNUPABOUTBW_CONTENTSBW_+!DAILY_BRIEFINGSEARCHCONTACT_US


View items related to this story


THE NEW WORLD ORDER

With his daring bid for MCI, Bernie Ebbers seeks to build WorldCom into a new kind of telecom empire

If you want a revolution, call a revolutionary. While other phone-company executives huddle with consultants, lawyers, and investment bankers to figure out how they can position their companies in the new world of deregulated telecommunications, Bernard J. Ebbers is at the ramparts. A onetime high school coach who fell into telecom through a lucky investment with some pals in Mississippi, Ebbers is now showing industry veterans what the new era in communications is all about. After a series of deals that took his company, now known as WorldCom Inc., from an idea in a coffee shop to the No. 4 in long-distance, this outsider has proposed a stunning takeover--potentially the largest merger in U.S. history--to produce the first new-era telecom giant.

First thing in the morning on Oct. 1, Ebbers picked up the phone in a New York hotel and called Bert C. Roberts Jr., chief executive officer of MCI Communications Corp. Roberts wasn't in, but he returned the call at about 8:30. Ebbers calmly informed the MCI exec that WorldCom, which had revenues of just $5.6 billion last year, was ready to proceed with an unsolicited offer for MCI, the No. 2 long-distance company, which had $18.5 billion in sales last year. Never mind that Roberts had recently gone through wrenching negotiations to re-price a long-anticipated merger with British Telecommunications PLC. Ebbers would top BT's $19 billion deal--offering $30 billion in stock and the assumption of $5 billion in debt.

It was a wake-up call for the entire industry. Ebbers, in fact, joked with reporters that if Roberts winds up working for him, he'd better be in the office ''a little bit earlier.'' MCI and BT have declined to comment on WorldCom's proposed deal.

The WorldCom-MCI deal, if it passes regulatory muster and is approved by shareholders of both companies, is far more than the latest coup for a brash dealmaker (time line, page 28). If Ebbers is able to pull it off, WorldCom will become the first major phone company since the breakup of the old AT&T to offer long-distance and local service across the U.S. Indeed, even as Ebbers was briefing analysts and reporters on the bid for the nation's No. 2 long-distance company, his bankers were nailing down a $2.9 billion deal to acquire Brooks Fiber Properties Inc., which will extend WorldCom's local-calling network. Equally important, WorldCom, which already owns the No. 1 Internet service provider, UUNET, would get a huge boost in cyberspace communications from MCI's Internet ''backbone'' network.

That makes WorldCom the very model of a 21st-century phone company. Right off the bat, the deal will let WorldCom offer businesses one-stop shopping for nearly all their communications needs. Down the road, however, the combination of local, long-distance, voice, and data networks puts WorldCom in position to become the first carrier to offer a seamless digital network. Eventually, the company will be able to move all sorts of traffic--voice calls, video, Web pages--across a single digital path. ''I think the world changed today,'' says Bruce E. Behrens, who manages the Flag Investors Telephone Income Fund, a major WorldCom shareholder. ''This changes the dynamics of the industry.''

"MASTERSTROKE." It's not that nobody else has ever thought of putting all these pieces together. It's just that they haven't done it. ''This was a masterstroke by Ebbers,'' says William K. Newbury, an analyst at TIAA CREF, a WorldCom investor. ''That's what makes him so good--he does things out of the box.''

Ebbers lives out of the box. In an industry dominated by colorless phone-company lifers, he's a cowboy--literally. Born in 1941 in Edmonton, Alberta, Ebbers came to the U.S. and enrolled at Mississippi College, near Jackson, where he won a basketball scholarship. He never left. After earning a physical education degree, he spent a year coaching high-school sports teams before investing in a Mississippi hotel company.

In 1983, a year before AT&T's breakup, Ebbers and three other entrepreneurs got together at the Days Inn coffee shop in Hattiesburg, Miss., and hatched a plan to start a long-distance company. Ebbers was originally just an investor in what was called LDDS, for Long-Distance Discount Service. The company started by reselling long-distance service it bought wholesale from AT&T and other larger carriers.

Before long, however, the company began to falter, and in April, 1985, Ebbers came on full-time as president. He developed a passion for dealmaking and, through a series of about 50 transactions, boosted the company into a major long-distance player. He started out by gobbling up small long-distance companies in the South and West. Deals for Metromedia Communications, Resurgens Communications Group, and IDB Communications Group in 1993 and 1994 catapulted the company into markets in the Northeast, California, and Europe.

BULKING UP. In the past year, Ebbers' acquisition pace has been startling. Using the strong currency of an ever-rising stock (page 30), the dealmaker has bulked up in local calling and data services. Last December, he paid $12.5 billion for MFS Communications Co., a company that lets large businesses connect their voice and data calls to long-distance networks without using the local phone company or paying access charges. The MFS deal also brought it UUNET Technologies Inc., the Internet service giant. John Sidgemore, UUNET's president, serves as WorldCom's techno-visionary. On Sept. 8, Ebbers beefed up the Internet end of the business again by purchasing CompuServe from H&R Block. It kept the CompuServe network and traded its online service to America Online in exchange for AOL's data-networking subsidiary.

The combination of long distance, local service, and data communications has proven potent. Operating income hit $896.1 million in 1996, six times the level in 1992, on revenues of $5.6 billion. Revenues are expected to grow an additional 23% this year, to $6.9 billion, not counting the latest deals. Now, with the planned MCI merger, WorldCom is a power--potentially the power--to be reckoned with. ''Ten years ago, WorldCom was a mouse among elephants,'' says Daniel F. Akerson, former MCI president and now CEO of Nextel Communications Inc., a wireless venture. ''Now it is literally bringing the elephants down.''

Ebbers may spend a lot of time with Wall Street investment bankers, but he hasn't lost any of his down-home style. He often walks through company headquarters in Jackson, Miss., in faded jeans, chomping on a cigar. He jokes that certain workers don't like him around ''because I'm a Willie Nelson fan.'' On weekends, he loves to spend time on his cattle and soybean ranch. ''The best relaxing time is riding the tractor,'' he says.

If the MCI deal goes through, Ebbers may have trouble finding tractor time. This deal has a scale few have ever attempted and involves risks Ebbers has never before contemplated. ''MCI is a whale compared with all the other companies they've swallowed,'' says Scott Cleland, an analyst at Legg Mason Wood Walker Inc. In long distance, the new company would command a combined market share of about 25%. The scale of its combined networks, Ebbers says, will produce efficiencies that will free up resources for marketing and customer service.

CHEAP CAPITAL. Initially, the focus of the combined companies' efforts will be on business customers, where profits are more reliable. In consumer long distance, periodic price wars and market-share battle disrupt earnings. ''We will look at the residential market as long as it doesn't hurt our stock price,'' said Ebbers in an interview with BUSINESS WEEK.

Ebbers has come this far by paying careful attention to the stock price. Over 10 years, ending in 1996, WorldCom averaged an annual return to shareholders of 53%. Only one company, Oracle Corp., had a higher average return. WorldCom stock--now trading at a whopping 90 times earnings--gives Ebbers the cheap source of capital to do his deal. He also has a tidy personal stake, some 14 million shares worth about $500 million. In April, Ebbers bought 1 million shares on the open market. ''I'd say his interests are certainly aligned with shareholders','' says David M. Leach, head of the compensation consulting practice at Compensation Resource Group Inc.

That's not to say that this giant financial leap doesn't have some investors scratching their heads. Ebbers proposes to pay a stock price that amounts to just shy of WorldCom's entire market capitalization. ''I'm putting the likelihood at 1 in 10 of WorldCom pulling off the merger,'' says Tom Aust, a telecom analyst with Citicorp Securities Inc. ''I think it is a big PR grab--a move to say we are a player.''

To prove he's a player, Ebbers has to work on making the deal pay off. Indeed, WorldCom expects to reap as much as $2.9 billion in savings in the first year the deal is completed, probably 1999. British Telecom expected to save that much in five years from buying MCI. The figure assumes savings in capital spending, reduced access charges to local-phone companies, and lower overhead. Annual savings are expected to reach $5 billion in 2002.

SALIVATING. The deal is sure to win support among MCI shareholders. Many were burned badly when British Telecom ratcheted down its offer for mci. The prospect of a 43% premium over the current offer has some salivating. ''We're delighted at the higher offer,'' says David M. Graham, director of research at Palley-Needelman Asset Management Inc., a $5 billion investment company in Newport Beach, Calif. ''I can't imagine why shareholders would vote for the BT offer over the WorldCom offer.''

What about a spurned British Telecom? Without a major acquisition like MCI, it has no clear path into the U.S. and its $180 billion long-distance and local phone markets. What's more, without a presence here, it will be extremely difficult for bt to win business from multinational corporations that want one provider around the world. ''It'll blow BT's global ambitions out of the water,'' says Stan Pearson, investment director for British equities at Scottish Widows, an Edinburgh-based pension fund.

Still, it's not out of the question that British Telecom will cede MCI. BT's shareholders have already complained that the acquisition was too pricey--especially after MCI disclosed that its losses for the second half of this year would be $800 million, or double what was expected. It's highly unlikely that BT will actually increase its bid to make it competitive with WorldCom's. And British Telecom actually benefits from the higher offer--its 10% MCI stake is worth $1.2 billion more under the WorldCom bid. ''BT may look at this as a way out of a very difficult situation,'' says Daniel Reingold, senior U.S. telecom analyst at Merrill Lynch & Co.

ANTITRUST CONCERNS? The biggest hurdle may be in Washington. Government officials are already up in arms over what many consider the failure of the Telecommunications Act of 1996 to spur further competition in local and long-distance telephone service. With the No.2 and No.4 largest long-distance providers combining, there's likely to be even less aggressive price cutting in that market. ''I think it's a big question whether the government will approve this deal,'' says Cleland of Legg Mason.

What's more, MCI and WorldCom own two of the biggest chunks of the Internet--which could raise antitrust concerns there as well. According to market researcher Yankee Group, the two companies control 57% of the consumer Internet access market. ''This merger has to have some anticompetitive implications,'' says Melanie A. Posey, a senior Internet analyst at International Data Corp. ''We're getting to the point that if you want to do anything on the Internet, you can't avoid dealing with UUNET.'' WorldCom downplays the danger of such a combination. A company official asserts that no one entity can dominate the Internet.

Nor will any one company dominate the new telecom era. But the specter of WorldCom-MCI racing out ahead has executives across the communications industry pondering a new landscape. The new company is likely to become the biggest threat to the Baby Bells in the $100 billion local telephone market. BellSouth, which is pushing the Federal Communications Commission to allow it into the long-distance business, is already griping about how WorldCom-MCI will be unrestrained in its expansion into local calling. ''This just adds another large company to the list of those who have the freedom to compete in all areas of the telecommunications industry while we're still fighting for that freedom,'' says a spokesman.

For long-distance rivals, the threat is more immediate. WorldCom has already been gaining on the big carriers--MCI included. And now, with Brooks Fiber and MCI's nascent local business, it will leapfrog other long-distance carriers into local calling. What's more, it avoids access charges by using its own local connections. That could give WorldCom a pricing edge over long-distance rivals.

JUST A JOKE? In the Oct. 1 press conference, Ebbers cracked that AT&T was his ''other choice'' but that when he called Walter Elisha, an AT&T director, he ''didn't know who we were.'' The audience took it as a joke--but was it? Ebbers declined to clarify the remark, and AT&T says WorldCom never made an offer. But it declined to say whether it had been contacted by WorldCom. In a statement, AT&T said of the deal: ''WorldCom's latest play doesn't affect our strategy in the least.''

Perhaps, the only part of the industry that isn't affected by the WorldCom deal is wireless calling. Neither MCI nor WorldCom has built a presence in cellular or the newer Personal Communications Services markets--although they both resell wireless services for customers who want it. Ebbers says that resale is a good strategy for the companies to pursue and that he doesn't need to own wireless networks to serve his core business customers.

Still, Ebbers needs to do more than combine companies to make his new colossus into a competitive threat that lives up to the fear and loathing it's inspiring. Critical to the deal will be the way MCI's management reacts. Much of what WorldCom wants is the marketing savvy of MCI's executives. It could be self-defeating to win the company but lose a big chunk of its top staff.

But WorldCom may do better than BT on that score. Many MCI execs will profit personally from the higher WorldCom offer because of their stock options. Also, Ebbers says that he doesn't plan wholesale layoffs and wants to integrate MCI managers into WorldCom. ''We all come from different companies,'' he said at the press conference, gesturing to his top management. ''We consider it one of WorldCom's strengths.''

Ebbers--as usual--has not the least doubt that he will succeed. Asked about the probability of the merger going through, he answered: ''One hundred percent! We are confident that [MCI] will come to the table and negotiate. Whether that happens or not, we're confident that this deal will go through.''

MCI management has reason to play hard to get. If they reject the BT offer, MCI has to pay a breakup fee of $450 million. However, if MCI's shareholders vote against the deal, the company pays BT nothing. And then there's possibility of trouble from across the ocean. Not to worry. Ebbers has a notion: ''After we get our deal done with MCI,'' he says, ''we may acquire BT.'' Ride 'em, cowboy.

By Peter Elstrom in New York with Amy Barrett in Philadelphia, Cathy Yang in Washington, Julie Flynn in London, and bureau reports



RELATED ITEMS

COVER IMAGE: Telecom Cowboy

TABLE: WorldCom and MCI, Together

TABLE: How WorldCom Dealt Its Way into the Big Time

THE MATH BEHIND THIS $34.5 BILLION DEAL

CHART: Strong Currency

`THIS IS THE OFFICIAL DAY THE TELECOM WARS BEGIN'

TABLE: Telescramble!

THE BIG PROMISE IN LITTLE TELECOMS

CHART: Wired Winners

Return to top of story


SIGNUPABOUTBW_CONTENTSBW_+!DAILY_BRIEFINGSEARCHCONTACT_US


Updated Oct. 2, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
Terms of Use