WorldCom Deal Presages Furious Local Phone Fight
WorldCom, the upstart company that bid $30 billion for MCI Communications last week in potentially the largest merger in U.S. history, is on top of the world right now.
Wall Street investors, unfazed at its attempt to swallow far larger MCI, have boosted WorldCom’s stock price another few dollars to more than $38 a share, giving it a total market value 75% more than that of MCI and half that of giant AT&T; itself, the telecommunications industry’s old man of the mountains.
WorldCom is no fluke. The Jackson, Miss.-based company that started as a reseller of long-distance phone service has become an industry force in a single decade by swift action to capitalize on trends.
Beyond telecommunications, its success to date reflects truths about the American business system and investment priorities today.
But the question investors and business people should ask is: What will WorldCom look like five years from now?
Less glamorous than it appears today is the answer. It will be an embattled company, slugging it out with gnarled veterans and upstarts like itself in the hellishly competitive telecommunications field. Its sky-high stock price--now at 102 times WorldCom’s earnings--will be history.
That doesn’t mean WorldCom won’t succeed. It may well become the global power that its ambitious chairman, Bernard Ebbers, and vice chairman, John Sidgmore, envision.
But it won’t dominate the telecommunications field, which is expected to grow from $250 billion in total revenues today to more than double that in five years. Too many competitors want that business, from the present lineup of telephone giants to companies now identified with computers, such as IBM and Microsoft. There will be others.
To succeed, WorldCom will have to show it can manage a varied enterprise--a challenge it will face real soon if it succeeds in acquiring MCI, which, with 55,000 employees, is four times its size.
Washington-based MCI, the company that broke AT&T;’s long-distance monopoly in the 1970s, was slowing in its growth. Price wars had wrung much of the profit out of the long-distance field. That’s why MCI top managers Bert Roberts and Gerald Taylor have been in the process since last year of selling out to British Telecommunications. WorldCom trumped British Telecom’s bid because it sees a profitable new battle arising in local telecommunications services to business. It really isn’t interested in consumer long-distance phone calls, and may spin off that portion of MCI’s operations.
But local service to business customers is a fat profit field--margins as high as 70% before interest and taxes--that is waiting for deregulated competition. In fact, the Telecommunications Act of 1996 is designed to encourage newcomers to get into the market as competitive local carriers.
WorldCom read that law and promptly acquired Metropolitan Fiber Services, which has strung fiber-optic networks for business customers around 60 big cities. Last week, the day before its MCI bid, WorldCom offered $2.9 billion for Brooks Fiber Properties, an insurgent local carrier similar to MFS.
Such attractive markets don’t fall easily. MCI has been paying cash premiums to get business customers to sign up for its local service. But when contracts run out, customers frequently depart for the next bidder.
WorldCom will approach the field by pushing hard. Sidgmore, the company’s chief operating officer, tells sales people not to sign up $1,000-a-month customers unless they can get billings quickly up to $7,000 a month.
How? By offering services, particularly Internet services. WorldCom owns the largest Internet network provider, UUNet, and if it wins MCI, it will add the second-largest. Internet business is booming as companies link customers and suppliers in constant communication. Even small companies have begun to sell services and buy supplies over the Net, says Stephen Johnson, a Silicon Valley engineer and management consultant.
The upshot is explosive growth. The Internet is now generating $7 billion a year in telecommunications revenue and is heading for $200 billion within five years. That’s not to mention the hundreds of billions in goods and services that will be traded over the Net.
With its Internet capacity as engine, WorldCom hopes to attract business customers and expand its relations with them. Many are impressed with its chances.
“MCI is a big jump, but it’s hard not to get excited about the way WorldCom has been putting the pieces together,” says William Davidson, a telecommunications professor at USC and consultant to companies.
But competition will be intense. AT&T;, now floundering, wants local business markets badly and can launch an impressive Internet effort. GTE has already acquired BBN, a major Internet service provider to corporations. The regional Bell operating companies will mount their own efforts to protect valuable markets.
And newcomers will enter the field. Teligent, run by a former president of AT&T;, plans to offer high-capacity Internet connections to small companies through wireless telecom technology.
In other words, the field is wide open and will swarm with competitors. Small-business customers will benefit from better services, new technology, competitive pricing. And residential consumers in the next decade will benefit from techniques and products developed now for business.
But the competition may not yield a single clear winner. Rather, “today’s 15 to 20 major telecommunications companies will shrink to five or six,” says an executive in the industry, “but 15 newcomers will spring up around us.”
The result is creation--of wealth, jobs and industry, explains William Tai, a venture capital partner in Institutional Venture Partners of Menlo Park, Calif., and the head of AuNet, a company that is starting an Internet network in Taiwan in collaboration with WorldCom.
“In Silicon Valley in the last decade, the market value of IBM, when it was dominant, has been dispersed among Intel, Microsoft, Compaq, Dell and many others,” Tai explains.
Now, similarly in telecommunications, “the vast market values of the old AT&T; and the regional Bell companies is dispersing. And WorldCom and other insurgent companies are creating a new industry,” Tai says.
In the process, as in the Big Bang that created the universe, industries grow to far greater size and value.
For investors, such profound change redefines prudence. Prudent investment used to mean large companies, like the old American Telephone & Telegraph, overseen by gray-suited directors, cautious and slow to change.
Today, prudent investment can mean companies like WorldCom and constant change.
The difference is healthy: It means stock market investors today favor growth, not the status quo.
