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Technology Stocks : MCI Communications (MCIC) -- Ignore unavailable to you. Want to Upgrade?

To: P.M.Freedman who wrote (1659)	7/28/1998 9:26:00 AM
From: paul t	Read Replies (1) \| Respond to of 1692

An article from Monday: Monday July 27, 4:27 pm Eastern Time Company Press Release SOURCE: Communications Workers of America CWA: What's WorldCom/MCI's Real Strategy? WASHINGTON, July 27 /PRNewswire/ -- The Communications Workers of America sent the following letter to 900 major institutional investors in the telecommunications industry regarding the pending WorldCom/MCI deal. For a copy that includes various tables, contact Sumanta Ray. With the Department of Justice and European Commission approval of the divestiture of MCI Internet as an appropriate remedy for their anti-trust concerns, our focus turns solely to the Federal Communications Commission (FCC). There, regulators must consider whether the merger is in the public interest. Like the anti-trust review, FCC approval will likely come with conditions. We want to share with you what we believe to be a fundamental dichotomy facing WorldCom as it seeks FCC approval for its merger with MCI. On the one hand, WorldCom must promise regulators that the new MCI-WorldCom will behave more like MCI than like WorldCom, in that it will continue to focus and compete in the mass residential market. On the other hand, WorldCom must maintain its promise to shareholders that it will acquire only fast-growing businesses that focus exclusively on the commercial sector. Shareholder interests stand directly opposed to regulators' concerns for expanded competition for all consumers. To satisfy regulatory concerns, MCI- WorldCom must promise to compete in MCI's slowest growing, and least profitable, markets. To its shareholders, WorldCom claims that the merged entity will behave more like WorldCom than MCI. How these divergent interests will be reconciled determines the investment viability of MCI-WorldCom. WorldCom is paying more than $30 billion premium over MCI's book value and is adding $7.5 billion in debt to its balance sheet. Is MCI really worth that much? And, can MCI-WorldCom continue to meet its promise to shareholders? Several analysts and other investors we have talked with have expressed concerns about the merger. We followed up on their suggestion to take a look at some basic numbers to see what the merged entity will look like in terms of revenues, growth, income margins, and market capitalization. -- Revenue base MCI's revenue base is 2.7 times the size of WorldCom's ($19.6 million vs. $7.3 million). After the merger, 72.8% of the combined company's revenue will come from MCI. Less than one-third will come from WorldCom. -- Revenue growth WorldCom is certainly buying a lot revenue -- $20 billion annually. In the short-term, the merger is being driven by promised cost-cutting synergies. But in the long-term, shareholder value can only be enhanced by top-line growth. Can WorldCom continue to grow revenues after the merger with MCI? WorldCom's growth rate is currently 38% -- 4.75 times greater than MCI's. After the merger, WorldCom's growth rate will be reduced by more than half to 16.2% (weighted average based on revenue). MCI is divesting its fastest growing line of business: its internet business (77% growth in first quarter 1998). MCI Internet's growth rate is 9.6 times greater than its overall growth rate. This divestiture will further dampen the merged company's growth rate. -- Income margins WorldCom has vowed to its shareholders that it will only acquire companies in high-margin lines of business. The MCI acquisition clearly violates this promise to shareholders. MCI revenues come from less profitable sources. WorldCom's revenues generate 4.4 times as much operating income as MCI's revenues (14.9% vs. 3.4%). After the merger, WorldCom's income margins will be cut by more than half (weighted average based on revenue). -- Market capitalization growth After the merger, the new MCI-WorldCom will have a market value in excess of $70 billion. At that level, WorldCom will have difficulty in continuing to make its market value grow at historical rates. WorldCom's market capitalization is 7 times its total revenue. In sharp contrast, MCI's market value is only 1.1 times revenue. After the merger, WorldCom's market capitalization will increase much more slowly: $2.7 for every revenue dollar (weighted average based on revenue). In conclusion, it appears as though WorldCom is breaking its promise to shareholders by acquiring a slow-growing company that doesn't have an exclusive business-only orientation. Today, WorldCom enjoys a higher P/E ratio than most of its competitors, which has permitted it to continue to make all stock acquisitions. Its high P/E ratio is underpinned by its high-growth, high-margin market focus. MCI's pre-merger P/E ratio was below 20. WorldCom's P/E ratio is above 100. It's unlikely that WorldCom will sustain its P/E ratio after the merger. Some analysts we have talked with have strongly suggested that WorldCom's P/E ratio will face major re-adjustment after the merger and will be a lackluster performer for at least two years following the merger. Perhaps that is why David McCourt, who sold McCourt Fiber Networks to WorldCom over one year ago and now sits on WorldCom's board, filed a prospectus with the Securities Exchange Commission on June 29, 1998, to sell all his WorldCom stock, worth an estimated $44.5 million. In May of this year, WorldCom's Chief Operating Officer, John Sidgmore, sold nearly $15 million in shares of WorldCom. Former WorldCom executive James Crowe, who put UUNet and MFS together, left last year with twelve former MFS executives to create Level 3 Communications. The Communications Workers of America doesn't expect investors to share regulators' concerns. However, we expect investors to conduct a rational review of the numbers. If you would like to discuss the issues presented here, please contact George Kohl or Sumanta Ray. We can be reached by phone at 202-434-1185, or by email at sray@cwa-union.org. SOURCE: Communications Workers of America