BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE
INFORMATION TECHNOLOGY

Doc Ebbers' Miracle Diet for MCI
The tight-fisted CEO is remaking MCI in WorldCom's image

WorldCom Inc. CEO Bernard J. Ebbers didn't waste any time in showing MCI Communications Corp.'s senior brass that the free-spending days of the second-largest long-distance company were over. When he summoned MCI's top 20 executives to a powwow in Destin, Fla., last July--two months before the two companies merged--he gave them several weeks' notice. Why? He wanted the execs, who were accustomed to plush corporate jets and first-class comfort, to scrounge up discount airfares. When they got there, more surprises awaited: Instead of finding the usual company limos that would whisk them to their hotels, they had to elbow their way to the rental-car counter. No buffet was set up for their arrival. And they had to double up in hotel rooms.

Ebbers--known as ''Bernie'' throughout the industry--was just as welcoming. First on the meeting's agenda: He warned that anyone who left the room during the presentation couldn't return until the break. Then he told them that under the WorldCom regime, they would have to submit monthly revenue statements--or ''monrevs''--so he personally could police their spending. ''It was a tough change,'' says one MCI exec.

Since WorldCom completed its $37 billion acquisition of MCI, Ebbers has brought a new slim-fast management approach to the long-distance company. To pay for the deal, he promised Wall Street that he would slash $2.5 billion in costs, rising to $5.6 billion by 2002. About half the savings in 1999 would come from putting their customers' phone and Internet traffic on each other's networks to avoid leasing links from other companies. What's more, Ebbers wants to ax MCI's overhead--one of the industry's cushiest at 30% of revenues--to about 23% this year. As part of that effort, MCI WorldCom Inc. (WCOM) has laid off 2,215 workers so far.

But there are some who fret that Ebbers will take his penny-pinching ways too far. MCI veterans say that if the cuts deepen, it could destroy the company's key strength--the marketing magic that helped break AT&T's monopoly. MCI is simply different from WorldCom, they argue. While WorldCom, based in Jackson, Miss., has focused on small to midsize businesses, Washington-based MCI excels at snagging consumers and high-end corporate customers--markets where you need to spend money to make money. ''The world has changed for Bernie,'' says a former MCI exec. The company insists Ebbers won't cut core sales and marketing--he'll cut back office staff instead.

CRITICAL WEAKNESS. Just as important, Ebbers lacks several key strategic assets even after combining the two companies. One critical weakness: MCI WorldCom has no presence in the booming wireless industry. Ebbers has resisted buying a wireless company because the service hasn't been important to business customers. But analysts think the service is too popular to ignore any longer. Moreover, MCI WorldCom lacks a broad local-service offering for residential customers. Even in New York, where the company said it would offer local service, it has taken only minor steps. ''Watch what they do, not what they say,'' says James G. Cullen, president of Bell Atlantic Corp. (BEL)

Still, Ebbers' high-stakes gamble to take over MCI seems to be paying off. On Feb. 11, MCI WorldCom reported fourth-quarter revenues surged 14%, to $8 billion for the combined companies, while net income hit $428 million after a loss in the year-earlier period. Investors sent the stock soaring 5.5% that day, to $80.44. ''We are continuing to gain confidence in our ability to execute,'' Ebbers told analysts at the time. Indeed, WorldCom outperformed every other major phone company last year, boosting its stock 137%, vs. 60% for Sprint Corp. (FON) and 24% for AT&T (T).

And Ebbers doesn't plan on slowing down. He has positioned MCI WorldCom to capitalize on the fastest-growing segments of the telecom industry--data and international services. With the globe's largest Internet backbone, MCI WorldCom's data business is on a pace to triple, to $23.2 billion, by 2002, estimates Sanford C. Bernstein & Co.'s analyst Tod A. Jacobs. By contrast, AT&T's data revenues will be $13.9 billion, according to Jacobs.

Foreign shores may be just as lucrative. By building its own communications networks overseas, MCI WorldCom is expected to boost international sales 40% annually, to about $5 billion, in 2002. ''They're going to go through Europe and the rest of the world and take market share from the fat and happy incumbents,'' says Jeffrey Heil, director of equity investments at the University of California, a large shareholder.

A key advantage in the U.S. and abroad is that MCI WorldCom is determined to build its own network--and not rely on competitors like the Baby Bells. ''We don't want to negotiate with 48 other phone companies to do something,'' says John W. Sidgmore, MCI WorldCom's vice-chairman.

BUY 'N' SLASH. Ebbers' secret to success is tried and true. Since the former high school basketball coach got into the phone business in 1983 with the purchase of tiny long-distance reseller LDDS, he has bought 67 phone companies, changing their name to WorldCom in 1995. After buying companies, he slashes expenses and consolidates all traffic on a single network. Small wonder that his first yacht was named Aquasitions.

Ebbers is applying the same bottom-line philosophy at MCI WorldCom. On Sept. 27, the new company's top sales managers gathered at the America's Center in St. Louis. The folksy Ebbers told stories to help set the priorities for the new company. He said that one employee who is a single mother had been able to send her kids to college because of her WorldCom stock. Another woman had recently been able to buy a house in a better neighborhood thanks to her WorldCom shares. The point: Employees should focus on boosting shareholder returns. He then told them that everyone would receive stock options.

The new ethos of sacrificing expenses for profits is spreading throughout the organization. Ebbers sold three of MCI's five corporate jets and eliminated company cars for everyone but himself and Chairman Bert C. Roberts Jr., the former MCI chairman. And at the end of last year, the water coolers disappeared from MCI's headquarters in Washington. ''It sent a signal that this is not the old MCI,'' says one former MCI exec. While some employees feel such trivial cost-cutting is silly, many with new stock options in hand are in favor of trimming the fat.

It helps that Ebbers' down-to-earth attitude has made him popular among workers. Often clad in jeans and cowboy boots, the CEO drops in unannounced to MCI employees' offices for an informal hello--something that MCI's Roberts didn't do. One secretary mistook Ebbers for the fax-machine repairman.

He doesn't live like a typical CEO, either. He likes to hang out with friends in Jackson at casual restaurants like Tico's Steakhouse. The 57-year-old divorce is living temporarily in a modest double-wide trailer home on his soybean farm while he's building a house. He rides his tractor for fun. His prime indulgences are a new yacht, called Countach, and an enormous tract of land in British Columbia.

Ebbers' cowboy ways may change how MCI treats customers. In the past, MCI sought big-name accounts such as NASDAQ for the credibility and the brand-building these projects brought. But under WorldCom, these deals may be evaluated on whether they haul in enough dough. ''Large deals are having to be justified purely on hard numbers,'' says an MCI exec who recently left.

The cultural changes are likely to lead to the departure of some key MCI staffers. Insiders question the future of Timothy F. Price, former MCI president and now CEO of MCI WorldCom's communications business. While Price has been a champion of expensive sales promotions, Ebbers may pull the plug on such goodies, including the MCI Classic PGA tournament. The contrast in styles has led to widespread rumors that Price is on his way out. The company insists nothing is amiss.

As MCI WorldCom hits the rocky post-honeymoon phase, telecom veterans think Ebbers should keep some of the old MCI. ''I hope the culture that emerges will be a balance between the two,'' says former MCI exec Stephen Von Rump. So far though, MCI WorldCom is looking a lot more like WorldCom than like MCI.

By Catherine Yang in Washington, with Peter Elstrom in New York

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