IBM Swaps Its Phone Network for 18% of MCI Communications

Times Staff Writer

MCI Communications will buy one of its chronically unprofitable long-distance telephone rivals Satellite Business Systems, 60% of which is owned by IBM--in a complex transaction announced Tuesday. Analysts said the deal will significantly affect competition between American Telephone & Telegraph and both MCI and IBM.

MCI, the nation’s second-largest long-distance carrier behind AT&T;, will issue IBM 45 million shares, valued at $427 million, to obtain SBS’ satellite network and 200,000 customers. And IBM, which already owns Rolm--AT&T;'s leading rival in the telephone PBX market--will become the largest stockholder in MCI with about 18% of the common stock.

Under terms of the agreement, IBM will have an option to increase its MCI shares to a maximum of 30% in three years.

“IBM’s surrounding AT&T;,” said Brian Jeffery, director of research for International Technology Group, a Palo Alto consulting firm that monitors IBM. “What we’re seeing is coalition warfare. It’s a concentration of market power.”


Reacting to AT&T;

Richard Matlack, president of Infocorp, a Cupertino, Calif.-based market research company, compared the transaction to a round in a sumo wrestling match between IBM and AT&T.; He said IBM is reacting in part to AT&T;'s entry into the computer market dominated by IBM.

“These are two big, bulky companies feigning left and feigning right,” Matlack said. “One stakes out interest in a computer company, so the other takes a position in a telecommunications company. The clear winner in this is MCI. It’s an awful lot stronger with IBM’s name and money behind it.”

AT&T; reacted immediately to the news. Randall L. Tobias, chairman of AT&T; Communications, said that IBM’s new and “very big role in the long-distance business” is proof that AT&T; should no longer be subject to government restrictions that continue in the aftermath of telephone deregulation. Among other things, such restrictions prevent AT&T; from offering business customers complete packages of products, from telephone services to computers.


However, industry analyst Will Zachmann of International Data Corp. in Framingham, Mass., challenged the view that the transaction positions IBM as a major telecommunications competitor of AT&T.;

“I say that’s a lot of crap,” Zachmann said. “I say it’s a strategic retreat. IBM’s substituting majority ownership in SBS for a minority position in MCI. It’s an excellent deal for MCI, but it looks to me like IBM’s trying to cut its losses. It’s essentially getting out of the long-distance business.”

Pay $400 Million in Debts

Aetna Life & Casualty owns the 40% of SBS not held by IBM. The satellite company, based in Tyson’s Corner, Va., has struggled since starting operations in 1981 in the increasingly competitive long-distance market. Analysts had predicted that SBS, which has never turned a profit, would lose about $105 million this year.


As a first step toward selling SBS to MCI, IBM and Aetna reached a separate agreement in which IBM agreed, in part, to pay about $400 million in outstanding debts.

Aetna also “could receive a future payment from IBM depending on the market value of MCI stock at the time the merger is concluded,” the companies said.

Aetna Chairman James T. Lynn said in a statement that “while the transaction will produce a one-time capital loss to Aetna in the second quarter, it is consistent with our strategy to refocus resources on our basic insurance and financial-services businesses.” Aetna declined to give a projected loss figure.

MCI, in exchange for acquiring substantially all SBS assets and operations, would issue to IBM 45 million shares of MCI common stock and warrants for the purchase of an additional 7 million shares of MCI common stock at $15 per share. IBM also agreed to hold the shares for a minimum of three years. MCI stock rose $1.50 to close Tuesday at $9.50 in over-the-counter trading.


AT&T; was the third most-active stock Tuesday on the New York Stock Exchange, declining 67.5 cents a share to $23.50. IBM was fourth most active, closing up $1.125 at $122.

William G. McGowan, MCI chairman, told a Washington news conference that the acquisition of SBS “would significantly improve MCI’s revenues and capital structure and would add over 200,000 customers to the more than 2.5 million business and residential subscribers now served by MCI.” Projected SBS revenue for 1985 is about $500 million, according to an MCI spokesman.

Directors of IBM and MCI have approved the transaction, but the deal also is subject to approval by the Federal Communications Commission and antitrust reviews.