WorldCom Agrees to Buy Intermedia, Stake in Digex

WorldCom Inc. said it reached an agreement to pay $3 billion in stock for Intermedia Communications Inc. and a controlling stake in Digex Inc., a leading operator of computer centers that run Web sites.

The deal is WorldCom’s first since its failed foray into wireless communications through a planned merger with Sprint Corp. and its PCS unit.

When the Sprint deal fell apart in July, trounced by government worries about competition in long-distance and national network services, WorldCom said it would refocus on businesses like those involved in Tuesday’s agreement.

Intermedia, based in Tampa, Fla., is one of the biggest independent operators of voice and data networks in the country. WorldCom is already one of the biggest players in that business through its UUNet division.

But the gem in the proposed acquisition is Intermedia’s majority stake in Digex, a leader in the fast-growing industry of “hosting” Web sites for other companies on powerful computers located at centralized data centers. Such companies specialize in directing online traffic, delivering Internet content and e-mail and conducting secure transactions with consumers or other businesses.

WorldCom beat out several Digex rivals, including Exodus Communications Inc. and Global Crossing Ltd., in reaching an agreement to acquire the Beltsville, Md., company. Other competitors in this market include Qwest Communications International Inc. and AT&T; Corp., which Tuesday announced a $450-million contract to provide IBM Corp. space in its Web hosting centers.

Bernie Ebbers, chief executive of WorldCom, said the new relationship with Digex will accelerate his company’s expansion into Web-based hosting services by 12 to 18 months.

Analyst Scott Cleland of Precursor Group in Washington, said the acquisition is part of WorldCom’s increasing emphasis on data and Internet operations.

“This makes sense, especially after the Sprint misfire,” Cleland said. “Web hosting is a strategically important traffic generator for WorldCom’s Internet backbone.”

However, investors did not react warmly to the deal. On Tuesday, shares of WorldCom were down $3.19, or 8.6%, to close at $33.75 on Nasdaq. Intermedia jumped $8.61, or 38%, to close at $31.48, but Digex dropped $16.63, or 20%, to close at $67.88, amid disappointment that the company wasn’t being acquired in its entirety. Both companies trade on Nasdaq.

If the deal goes through, WorldCom would hold 55% of Digex’s equity and 94% of its voting interest. The balance of Digex’s stock would remain publicly traded.

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Investors’ Split Decision

Intermedia Communications jumped 38% on news of its acquisition by WorldCom, but Intermedia’s majority-owned Digex lost 20%. Investors had hoped a deal would include all of Digex.

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Intermedia shares, monthly closes and latest

Intermedia (ICIX)

Tuesday: $31.48, up $8.61

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Digex shares, monthly closes and latest

Digex (DIGX)

Tuesday: $67.88, down $16.63

Source: Bloomberg News