Time to Huddle
Now that MCI Communications has accepted a $37-billion takeover bid from WorldCom, rival suitor GTE must rethink its strategy for building its fledgling long-distance business and securing its long-term position in the rapidly consolidating telecommunications industry.
GTE’s first decision, of course, will be whether to remain in the MCI fray by sweetening its $28-billion all-cash offer and appealing directly to MCI shareholders.
The company on Monday said only that it’s “reviewing the situation.”
Because GTE had been talking to MCI over the weekend--and because WorldCom’s bid is widely considered to be quite high--many analysts said they did not expect GTE to up its offer. But if it doesn’t, analysts say, it will have to move quickly to find another partner and exploit its unique position in the business.
GTE’s historic focus has been local phone service, and the Stamford, Conn.-based company provides 21 million access lines for dial tones in 28 states, including California.
But while the regional Bell companies that provide local phone service in most of the country are barred from providing long-distance service, GTE is not subject to the same restrictions.
The company has moved to build its long-distance operations in recent years and now has 1.5 million customers. Analysts say, though, that the company could have been much more aggressive in staking out a position before the regional Bells are allowed into long-distance.
SBC Communications, Ameritech and BellSouth have all applied to sell long-distance service in their territories, although the Federal Communications Commission has not granted their requests.
“They need to start moving into new territory,” said Michael French, vice president of Insight Research, a telecommunications consulting firm in Parsippany, N.J. “Otherwise, someone’s going to move into their backyard.”
One such mover could be market leader AT&T.; Now under the leadership of Chairman C. Michael Armstrong, the company is periodically said to be interested in buying GTE--a combination that would certainly face strict regulatory scrutiny.
AT&T; declined to comment on the rumors.
If GTE insists on pairing with a big-name long-distance company, it could also strike a deal with Sprint, the No. 3 long-distance firm that GTE once owned, said Bob Wilkes, a telecommunications analyst with Brown Bros. Harriman in New York.
Even among the tier of smaller long-distance firms, GTE could do well for itself by acquiring a company like Excel Communications, IXC Long Distance or LCI International, said Dan Ernst, a telecommunications analyst with the Strategist Group in Washington.
GTE could also build its own long-distance business from within, starting with connecting the markets where it is the local phone company.
That task would be easier if it gets financial help from an overseas partner such as MCI’s onetime partner British Telecommunications, France Telecom or Nippon Telegraph & Telephone, analysts said.
Some analysts suggested that with MCI out of the picture, GTE should put the whole long-distance question on the back burner and focus on improving and expanding its core franchise in local service. The company could buy a competitive local access carrier that serves markets adjacent to cities where GTE already operates, French said.
Such a deal could also provide GTE with an important presence in high-profile markets such as New York, said Boyd Peterson, a telecommunications analyst at the Yankee Group in Boston.
Another key step is for GTE to invest in its much-maligned customer service operation, he said.
“They have not been able to overcome their dismal customer service operation, and that is going to impact them,” Peterson said. “If they had stellar customer service and consumers really liked them, they would be experiencing a much higher market share for long-distance.”
GTE stock rose $1.25 to $44.88 Monday on the New York Stock Exchange.
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A Powerful Combination
WorldCom’s proposed $37-billion stock buyout of MCI Communications raises major antitrust issues because both companies are already large players in the long-distance telephone and Internet businesses. Both the Federal Communications Commission and the Justice Department will review the merger plan to determine whether the deal would stifle competition and raise prices. A look at combined MCI-WorldCom market share in the long-distance and Internet backbone markets and how the merger could affect businesses and consumers:
Long-Distance
MCI, the nation’s No. 2 long-distance company, and WorldCom, currently No. 4, together would control about 23% of the U.S. long-distance market. Perhaps just as important, the combination would solidify the dominance of the three top players. But entry of the five regional Bell companies into long-distance, which many insiders expect will be permitted soon, could allay fears that long-distance is becoming an oligopoly.
1996 Market Share
AT&T; 42.1%
MCI/WorldCom 22.5%
Sprint 8.5%
Other 26.9%
Internet Backbone Services
With 40% of the business, MCI is the No.1 provider of Internet backbone services, which are used by retail Internet service providers to carry Internet traffic in bulk around the country. WorldCom holds about 20% of this market. Some industry watchers worry that the two companies combined might have enough market power to raise prices and could gain too much control over protocols that govern Web site names.
Current Market Share
MCI 40%
WorldCom 20%
Other* 40%
*Includes Sprint, BBN, GTE and PSI Net
Impact
On Consumers
WorldCom has long been focused on the business side of the market, and its lack of interest in the consumer side of the business could slow the introduction of new consumer services. Analysts have mixed opinions on whether the combination would speed or slow the arrival of competition for residential local phone service.
On Business
A combined WorldCom-MCI could provide better and cheaper services for some business customers, especially very large corporations. But the elimination of a large competitor might actually reduce choices for some business customers.
Sources: Federal Communications Commission, Times and wire reports, Yankee Group
Researched by JENNIFER OLDHAM / Los Angeles Times
Largest Mergers
Top U.S. corporate mergers if WorldCom completes its acquisition of MCI Communications:
Nov. 10: WorldCom agrees to buy MCI for stock valued at about $37 billion on Nov. 10, 1997, up from $29.3 billion bid announced Oct. 1. British Telecommunications, which had a $24-billion agreement to acquire MCI, drops out.
Aug. 14: Bell Atlantic combines with Nynex in an exchange of stock valued at $25.6 billion.
April 1989: RJR Nabisco merges with Kohlberg Kravis Roberts; $25 billion.
February 1996: Walt Disney buys Capital Cities/ABC; $19 billion in cash and stock.
April 1997: SBC Communications buys Pacific Telesis Group; $16.7 billion.
July 1997: Boeing acquires McDonnell Douglas; $16.3 billion.
April 1996: Wells Fargo buys First Interstate Bancorp; $14.2 billion.
January 1990: Warner Communications merges with Time; $14.11 billion.
December 1988: Kraft, merges with Philip Morris; $13.44 billion.
June 1984: Gulf merges with Standard Oil of California; $13.4 billion.
Source: Associated Press
