35 ?
March 7, 2001
Heard on the Street
Will WorldCom Entertain
Calls From the Outside?
By DEBORAH SOLOMON
Staff Reporter of THE WALL STREET JOURNAL
After all these years as an acquirer, WorldCom Inc. could soon be dialing up
a deal to sell itself.
WorldCom came out of relative obscurity in the 1990s to become the nation's
second-biggest long-distance telephone company. Now, with the company's
stock hovering near its lowest point in recent history, investors and industry
observers are buzzing about the potential for a WorldCom takeover.
While nothing appears imminent,
people close to WorldCom's chief
executive, Bernard J. Ebbers, say the
brash former basketball coach has
expressed interest in selling the
humbled Clinton, Miss., telecom firm.
Rebuffed by regulators last June in his
attempt to buy rival Sprint Corp., he
has stepped back a bit from the
hands-on approach he long took to
running WorldCom, handing much of
the day-to-day responsibility over to a
new chief operating officer of the core
business-services division. Mr. Ebbers
is said to be interested in parting ways with the company, which is second in
terms of number of customers to AT&T Corp., for the right price -- possibly
about $35 a share.
As of 4 p.m. Tuesday in Nasdaq Stock Market trading, WorldCom shares
were up 56 cents to $16.69 -- 74% off the high of $64.50 they hit in 1999,
but also off their 52-week low of $13.50 late last year, thanks partly to recent
speculation among traders about a possible takeover.
A WorldCom spokeswoman said the company wouldn't comment on any
deal speculation. Most investors and industry observers don't expect anything
to happen until at least the fourth quarter of this year or the beginning of next
year. And WorldCom could wind up going it alone if its growth rate
strengthens.
Still, "the rumor is flying so much because WorldCom has been doing things
that are very akin to what a company does when it readies itself for a sale,"
says Robert Gensler, portfolio manager at T. Rowe Price Associates Inc.
Among the signs: a restructuring that the company announced last November
that will create a separate tracking stock for certain slow-growth parts of its
business, including its huge consumer long-distance unit. If that restructuring is
followed by an actual spinoff of those operations, it could free up the
faster-growing parts for an acquirer to snap up.
The likeliest buyers: the regional Bell phone companies, such as BellSouth
Corp., SBC Communications Inc., Verizon Communications and Qwest
Communications International Inc., which now owns US West. BellSouth,
SBC, Verizon and Qwest declined to comment.
"What the Bells want is more advanced data and Internet capabilities, and
access to business customers," says Blake Bath, an analyst with Lehman
Brothers. Buying WorldCom, one of the few firms that sells telecom services
to major corporations, would be a quick, easy way for a Bell to crack that
market. Plus, an acquirer would get UUNet, the Internet backbone owned by
WorldCom, along with its Web-hosting capabilities.
A sale of WorldCom would mark a remarkable end for a company that has
long been considered one of the few telecom companies likely to survive
consolidation and emerge as a dominant global player. But the past year has
been a bruising one as WorldCom has struggled with rapidly falling
long-distance prices, sluggish revenue growth and aggressive competition
from companies including Qwest.
Analysts and investors say Mr. Ebbers isn't likely to head back to Washington
until he is sure a deal to sell WorldCom can pass muster. One thing that could
be in the company's favor: The climate in Washington would likely be more
welcoming this time around. Industry observers expect the new Federal
Communications Commission chairman, Michael Powell, to take a more
laissez-faire approach to regulating the phone companies.
Under the planned restructuring, WorldCom, which reported revenue of
$39.1 billion last year, would segregate slow-growth operations, including the
consumer long-distance unit that it acquired when it bought MCI
Communications Corp. in 1998, and create a tracking stock for them. Such
stocks reflect the performance of a business unit, but the unit itself isn't a
separate corporate entity. Following the reshuffling, the core of WorldCom
would be its business of selling data-oriented services to corporate customers,
such as high-speed Internet connections and Web-hosting products.
Eventually, industry observers expect WorldCom to spin off the consumer
long-distance business, a move that could make it easier for potential
acquirers to buy the remaining business-services operations. Mr. Ebbers, in
fact, has said the tracking stock leaves room for WorldCom to spin the MCI
business off entirely later on. The business-services piece, with more than $22
billion a year in revenue, is considered by analysts to represent virtually all of
WorldCom's roughly $50 billion in market capitalization, given its heady
growth prospects, compared with the lackluster prospects for consumer long
distance.
One big sticking point in any Bell-WorldCom merger has been the Bells'
inability, as a result of regulatory constraints, to sell long-distance service
within their home regions. If WorldCom sheds its consumer business entirely,
industry observers say, a merger with the remaining business-services unit
may be more palatable to regulators, who wouldn't be worried about stifling
competition in the consumer long-distance business. Those concerns are what
helped scuttle the WorldCom-Sprint merger last year.
But some are speculating that with an easing regulatory climate, a
WorldCom-Bell merger could happen even if WorldCom doesn't spin off its
consumer business. Such a combination will become easier as more of the
Bells receive approval to sell long-distance services, something that could
come more easily with the new FCC chairman. Once that happens, regulators
may be more inclined to permit a Bell to buy a long-distance carrier. SBC and
Verizon already have approvals for long-distance sales in certain states and
are seeking additional clearances.
Regardless of whether WorldCom gets sold, investors say they expect further
consolidation in the telecom industry. Other potential acquisition targets are
WorldCom's peers -- AT&T and Sprint -- which have suffered many of the
same problems afflicting WorldCom. Industry observers speculate that
AT&T, in the midst of breaking itself into three separate companies, may
eventually merge one or more of its companies with another company. The
most likely candidate would be AT&T's Business Services division, which
some industry watchers say could be purchased by a Bell.
"The talk now is that at some point this year or next, the Bells will purchase
the long-distance companies," says Michael Eggly, portfolio manager for
Northern Trust, which owns shares of WorldCom and AT&T.
The question, investors say, is when. "The telecom companies are like
tectonic plates. Natural pressures build up and every so often you get an
earthquake -- a merger," Mr. Gensler says. "You can see the earthquake
coming." |
