Communication Firms to Join in $12-Billion Deal
Vaulting into the front ranks of the nation’s telecommunications industry, long-distance carrier WorldCom Inc. said Monday that it will acquire the local phone operator MFS Communications Co. in a stock swap worth about $12.5 billion.
Though their names are little known outside the telecommunications industry, WorldCom and MFS--when merged into a new company dubbed MFS WorldCom--will be poised to compete alongside AT&T;, MCI, Pacific Telesis/SBC and a few others as a full-line telecommunications provider that can offer a broad range of local and long-distance telephone services as well as access to the Internet computer network.
“Rarely in business do you have the opportunity to bring together the premier growth companies from key segments of an industry,” said Bernard J. Ebbers, president of WorldCom, which is based in Jackson, Miss. “We are creating the first company since the breakup of AT&T; to bundle together local and long-distance service carried over an international, end-to-end fiber network owned or controlled by a single company.”
Monday’s transaction is part of a sweeping consolidation and reorganization of the communications business set in motion by a landmark deregulation law passed earlier this year. Eventually, these changes should mean lower prices and more choices for both business and residential phone customers--though some fear the creation of a small number of giant firms could ultimately stifle competition.
WorldCom--which this year mounted its first high-profile national advertising campaign, starring Michael Jordan as its spokesman--has grown into one of the nation’s largest long-distance companies by making 40 acquisitions over the last few years.
The acquisitions, which included the purchase of WilTel Network Services last year for $2.5 billion, were carried out with the help of WorldCom’s billionaire chairman, John Kluge, who was once a major WorldCom stockholder through his Metromedia Co. Kluge’s company sold its stake earlier this year.
MFS, an 8-year-old company originally named Metropolitan Fiber Services, has built local phone networks in 45 cities that mainly serve large business customers. It’s the largest of about half a dozen companies that compete with the Baby Bells to provide local telephone service.
Together, WorldCom and MFS will be able to offer business customers “one-stop shopping” for a full range of local and long-distance telephone services. And they will also be able to offer access to the Internet through the network built up by a company called Uunet, which MFS acquired for $2 billion earlier this year.
All the big players in telecommunications are scrambling to offer a full line of services in the wake of the new law, which allows local phone companies to offer long-distance service and vice versa. The proposed mergers of SBC Communications Inc. and Pacific Telesis, and between Nynex Corp. and Bell Atlantic Corp.--both announced earlier this year--were driven largely by the desire of those companies to make a powerful entry into the long-distance business.
But these Baby Bell telephone companies will have to wait for more competition to develop before they can begin offering long-distance services. GTE Corp., meanwhile, has already begun to offer both--and WorldCom won’t be far behind.
The merger doesn’t directly affect residential customers in the short term, but because new competitors tend to skim off their business customers, the Bell companies may try to raise residential individual phone rates to compensate. “Business customers are the source of 50% of Bell company profits now,” communications consultant William Davidson said.
And beyond the short term, the proposed merger represents a change in technology that could have a profound effect on phone bills. Telephone companies, as everyone knows, charge by the minute for service. There are night and weekend rates and various special discounts, but pricing phone calls has always been time-based.
However, the advent of fiber-optic capacity and Internet services could change that. WorldCom and MFS already offer some flat-rate service to their business customers, as do the major long-distance and local carriers. As technology moves forward, the speed with which computer data and even video can be transmitted, makes charging by time a losing proposition for the service provider. So flat rates will tend to become the norm.
And those innovations, first appearing in the business world, will set a pattern for consumer pricing in future years.
Analysts were divided Monday as to whether the WorldCom-MFS deal makes business sense. Darrell Edmonds, an analyst at Bear Stearns & Co., estimates that deal could save WorldCom as much as $400 million a year in telephone access charges it pays to other local phone companies.
“There are significant synergies in this deal that make it very attractive,” Edmonds said.
But other analysts were not so sure. WorldCom currently sells bulk long-distance capacity to some local carriers--including GTE--and those customers might not like doing business with a competitor. Similarly, MFS does a lot of its business selling local circuits to long-distance carriers, who use them to directly connect with their customers.
“I don’t think this is a good merger at all,” said David Goodtree, a telecommunications expert at Forrester Research in Cambridge, Mass. “Before, AT&T; and others were quite willing to invest in MFS. Now I’m not so sure.”
On Monday, MFS shares soared $9.94 to $44.81 on Nasdaq. WorldCom stock fell $3.625 to $22.75.
Times Senior Economic Editor James Flanigan contributed to this story.
* ENIGMATIC FIGURE: WorldCom’s CEO has some scratching their heads. D1
* WIRELESS DEAL: MCI signs a major contract with start-up NextWave. D1
