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Technology Stocks : WCOM -- Ignore unavailable to you. Want to Upgrade?

To: JM who wrote (5196)	10/5/1999 5:28:00 PM
From: Anthony Wong	Respond to of 11568

MCI WorldCom's Record Bid, Sort of, for Sprint: David Pauly 10/5/99 4:52:00 PM ET Source: Bloomberg News (Commentary) New York, Oct. 5 (Bloomberg) -- MCI WorldCom Inc.'s takeover of telephone rival Sprint Corp. would be a world-beater -- until MCI WorldCom shares drop. Before long, the telecommunications enterprise fashioned by MCI WorldCom Chief Executive Bernard Ebbers using high-priced stock and ever-adjusted earnings reports has to stumble. When it happens, the value of the deal announced today won't look so enormous. (Until this one, Bell Atlantic Corp.'s pending $97.5 billion acquisition of GTE Corp. was biggest.) MCI WorldCom today bid $115 billion in stock and offered to assume $14 billion of debt to win Sprint in a bidding contest with BellSouth Corp., another phone company. Sprint stockholders would get $76 in MCI WorldCom stock for their shares, or 25 percent more than yesterday's closing price of $60.88 for Sprint shares. MCI WorldCom also would trade a so- called tracking stock for the similar Sprint issue -- Sprint Corp. (PCS Group) -- tied to the results of Sprint's wireless business. The price to be paid for the parent Sprint's shares isn't a sure thing. If MCI WorldCom shares trade at less than $62.15 at closing, which the companies estimated would be in the second half of 2000, Sprint owners would get less than $76 worth of new stock. WorldCom shares today traded at $66.50, down $5.12. Such an adjustment would be nothing compared with what would happen when investors sour on the company Ebbers built with more than 60 acquisitions in a decade, including MCI Communications Corp. last year and MFS Communications Co. It Adds Up On the surface, Ebbers' takeovers always make sense. Sprint would give Ebbers the wireless business he covets -- though Sprint PCS Group lost $1.2 billion in the first half of 1999 -- and strengthen his long distance and local phone businesses. WorldCom and Sprint combined have about 30 percent of the long distance market, for instance, compared with No. 1 AT&T Corp.'s 48 percent. Perhaps because it all seems so logical, MCI WorldCom stock has remained high enough so that Ebbers could use it in his acquisitions and not have to worry much about raising cash. The shares now trade at about 54 times the company's earnings in the latest 12 months. That compares with an average of about 31 times for companies whose stock is included in the benchmark Standard & Poor's 500 Index. Worse, it's hard to know what WorldCom's earnings really are. With Ebbers' constant acquisitions, earnings statements can be a blur of what-ifs and adjusted-fors. Dilution MCI WorldCom today said the Sprint acquisition would dilute its earnings per share as now stated, though it didn't say by how much or for how long. What it did say was that the takeover wouldn't dilute profit before charges for goodwill, the difference between the price paid for an acquisition and the target company's net worth. WorldCom's eagerness to use this kind of accounting, which the Financial Accounting Standards Board has under consideration, was apparent in its report for the second quarter. It pointed out that excluding goodwill from acquisitions, its second-quarter earnings were 59 cents a share, compared with 44 cents a share using current accounting standards. Goodwill from the Sprint acquisition would be enormous: $102 billion, according to Sprint's investor relations department. The amount would reduce MCI WorldCom's earnings by $5.1 billion a year for 20 years, Sprint said. No wonder MCI WorldCom prefers libertine accounting that would allow it to downplay goodwill writeoffs. Investors at the moment are willing to go along with this real-earnings-don't-count philosophy. But a stock market slump or a recession will bring them back to reality. If at about the same time Ebbers' acquisition game comes to a stop and investors get a static picture of WorldCom's income statement -- glory hallelujah. .