IBD article. Merger Machine WorldCom Geared Up For MCI Arrival
Date: 7/23/98
Author: Reinhardt Krause
The telecom industry's most well-oiled
acquisition machine, WorldCom Inc.,
appears to be in gear as it prepares to
complete its largest purchase yet.
WorldCom on Thursday is set to release
what analysts say will be strong
second-quarter numbers. It likely will be the
last quarterly report before WorldCom
completes its purchase - expected by late
August - of MCI Communications Corp.
That will catapult WorldCom to the No. 2
spot among U.S. phone companies, behind
AT&T Corp. And it will let WorldCom tap
MCI's vaunted sales force and top-notch
network. The merger should further fuel
WorldCom's growth, analysts say.
''They're (WorldCom) seeing acceleration in
each one of their business lines,'' said Frank
Governali, a Portland, Maine-based analyst
with Credit Suisse First Boston. ''MCI is also
seeing a turnup in its business. They're clearly
heading into the merger with a head of
steam.''
Analysts expect Jackson, Miss.- based
WorldCom's per-share earnings to rise to 20
cents, up from 8 cents in the year-ago
quarter, says Zacks Investment Research
Inc. For the year, WorldCom's earnings are
expected to more than double to 88 cents
from 40 cents.
Profit is rising even as WorldCom digests
several acquisitions made earlier this year.
They include Brooks Fiber Properties Inc.
and the network operations of CompuServe
Corp. and its parent, America Online Inc.
The acquisitions have added momentum to its
Internet and local operations, while
WorldCom's core long-distance business is
doing well, analysts say.
Internet revenue - including three months of
operating the former AOL and CompuServe
network groups - will account for 20% of
WorldCom's second-quarter sales, up from
17% in the first quarter, says Stephanie
Comfort, a Denver-based analyst with
Morgan Stanley Dean Witter.
She expects WorldCom's Internet sales to
grow to $2 billion in '98, up from $566
million last year. Despite the sale of MCI's
Internet assets to Cable & Wireless PLC,
which was announced this month,
WorldCom's Internet sales could hit $3.39
billion next year, Comfort estimates.
U.K.-based C&W is buying MCI's Internet
backbone and retail operations for about
$1.8 billion in cash. MCI sold off its Internet
business to win WorldCom merger approval
from regulators in Europe and the U.S.
With the Department of Justice giving the
merger a green light this month, the merger
awaits approval from only the Federal
Communications Commission.
MCI's Internet business was expected to do
about $375 million in sales this year. It has
about 1,300 Internet-service-provider
customers worldwide.
Losing MCI's Internet operations hurts, but
analysts expect WorldCom to rebound. It
owns UUnet, one of the largest ISPs. ''I'm
sure there is a renewed sense of urgency (at
UUnet) to grow faster to compensate (for
MCI),'' Governali said.
Analysts say MCI's polished marketing
machine should boost WorldCom's Internet
business by signing up larger commercial
accounts. WorldCom has lacked a national
sales force on the scale of MCI's.
WorldCom's network is expanding faster
than most other carriers. Analysts forecast
that its capital spending will climb to $3.8
billion this year from $3.2 billion last year.
The company is building networks in Asia
and Europe. Locally, WorldCom will soon
be able to tap MCI's operations. Through
'97, MCI had spent about $2 billion to build
networks in 31 U.S. markets dominated by
the regional Bells.
MCI, though, has stopped pursuing local
residential customers until federal regulators
win more concessions from the regional
Bells.
MCI had $19.7 billion in sales in '97, while
WorldCom reported $7.4 billion.
WorldCom's rising share price, though,
propelled the deal.
While WorldCom faces challenges in
integrating MCI, it has a solid track record in
mergers, analysts say. They project that the
combined companies will save $2.5 billion in
costs in '99 from post-merger synergies.
''I would expect to see a lot of action right
out of the gates leveraging each other's
strengths,'' said Jeffrey Kagan, president of
consultant Kagan Telecom Associates in
Atlanta. ''They've had plenty of time to plan.''
At an industry conference this year, John
Sidgmore, WorldCom's chief operating
officer, said the company had put in place a
100-day, post-merger plan that ''will knock
the industry's socks off.''
Still, once the Bells are able to offer
long-distance services, WorldCom's will
come under attack.
And even with MCI, WorldCom still has a
hole in its product portfolio: a wireless
network.
AT&T Corp. and Sprint Corp. are betting
that more people will soon use cell phones
full time, says Kevin Moore, a
Baltimore-based analyst at BT Alex. Brown
Inc.
(C) Copyright 1998 Investors Business
Daily, Inc.
Metadata: WCOM MCIC T AOL CWP FON I/4891
I/3241 E/IBD E/SN1 E/TECH
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