Internet upstarts take on the giants of the phone industryA $30-billion bid for US telecom giant MCI has rattled the industry. TONY JACKSON reports
ACCORDING to one of his oldest associates, Bernard Ebbers' knowledge of the workings of the telecommunications industry was once limited to how to make a phone call. Now the 56-year-old entrepreneur runs the fast-growing telecommunications group WorldCom, which this month tabled the largest corporate takeover bid in history when it offered to pay $30-billion for is MCI Communications.
The audacious bid remarkable in that until 18 months ago, few non-specialists had even heard of WorldCom. Odder still, the company is competing against the venerable phone giant British Telecommunications (BT), which has more than triple its revenues and makes profits of almost £4-billion, while WorldCom barely breaks even.
MCI directors met late on Friday night (after Business Times' deadline) to vote on whether to initiate discussions with WorldCom; the vote is widely expected to back talks with the telecom upstarts from the sleepy town of Jackson, Mississippi.
The friendly bid for MCI by BT 11 months ago values MCI at about $35 a share in BT stock and cash, while WorldCom has bid $41.50 a share in stock. WorldCom's bid is worth nearly $35-billion, including the assumption of nearly $5-billion in MCI debt.
The bid has raised some fundamental questions, notably how a relatively small US company, with interests in the Internet, can sweep aside one of the largest and most powerful global telecoms operators?
The answers are fairly simple. Firstly, the Internet is tearing up the rules of telephony, as it is many other businesses; second, the speed of the telecommunications revolution plays to the US's strengths, while the rest of the world struggles behind.
As a result new companies in Internet technology are challenging traditional telephone companies. And the focus has shifted from creating world alliances to competing in the US domestic telecoms market.
These points are illustrated by WorldCom's history. Two years ago it had a market value of $5-billion. Now, after voracious acquisitions, it is worth $32-billion - slightly more than its target.
Most of those acquisitions have come in the related worlds of data transmission and the Internet. In August last year WorldCom paid $14-billion for MFS, another telecom upstart which has ringed the world's financial centres with optical fibre and which owned UUNet, the world's leading supplier of access points to the Internet.
Three weeks ago, WorldCom did a deal making it the operating network for America OnLine, the leading US Internet provider. As a footnote to the MCI bid, it also paid $2.9-billion for Brooks Fiber, a US provider of broadband telephony.
Buying MCI seems a large but logical next step. MCI was a pioneer in building the Internet backbone - the network of wires that binds the whole system together.
Put together, the two companies would be well placed to exploit the advent of so-called "Internet telephony", whereby phone calls will go cheaply through the Internet, bypassing traditional phone companies.
That lies in the future. Meanwhile, another aspect to the deal appears to give WorldCom an edge in its contest with BT.
Over the years, WorldCom has built up a sizeable presence in US local telephony, which will be strengthened by the purchase of Brooks Fiber. Like MCI, it has concentrated on providing sophisticated broadband connections to businesses.
Until recently, government rules barred long-distance operators from offering basic local telephony to the home. MCI is the US's second largest long-distance company; WorldCom is fourth. Now that the rules are changing MCI is spending heavily in an attempt to break into the local market, previously the stronghold of regional monopolists, the so-called Baby Bells.
MCI's unexpectedly high spending plans, published three months ago, provoked a revolt among BT's shareholders. In response, BT cut its offer price sharply. And since its original offer was lower than the $41.50 a share now being bid by WorldCom, it seems inconceivable that BT can cap it.
WorldCom makes the remarkable claim that it can save $2.5-billion in the first year of the merger from better use of the combined network and cost savings. This is in sharp contrast to BT, which has virtually no presence in the US market.
This points to two lessons. Firstly, the slow process of deregulation in the US market is acting as a roadblock to outsiders such as BT, though within the US the technology is maturing and bypassing regulators.
Second, the chief thrust of strategy within global telecoms is shifting. When BT was triumphantly announcing its proposed link-up with MCI almost a year ago, the name of the game in telecoms was global alliances. That has now been overtaken by the turmoil within the US.
The lack of a US presence would be severe blow to BT's global plans. Nor would an MCI-WorldCom merger be popular with Deutsche Telekom or France Telecom, which have a three-way alliance with the US long-distance company Sprint.
Sprint is third in the US long-distance market after AT&T and MCI. A combined MCI-WorldCom could make it an also-ran.
The point can be applied more generally. In the world of old-style telecoms giants, BT counts as positively nimble. Unlike most of its counterparts around the world, it threw off the dead hand of state ownership more than a decade ago.
By contrast with WorldCom, though, it seems positively old-fashioned.
The contrast has added poignancy when we recall the terms in which the BT-MCI merger was presented last November. BT, we were told, might be a touch staid and slow-moving. But MCI was the maverick among phone companies, which had made its fortune taking on the might of AT&T and winning. MCI, it was implied, was the new ingredient to add zest to the BT culture.
That proposition seems to be stood on its head. In the US context it is MCI which seems slightly old and tired, sufficiently shaken by the pace of change to seek refuge in BT's embrace.
Companies like WorldCom represent the next generation: immensely fast-moving, amorphous and unpredictable. The same description could be applied to the telecoms business as a whole.
It is a world in which veterans such as BT-- to say nothing of Deutsche Telekom, NTT of Japan and all the other national behemoths - look increasingly out of place. - Financial Times