Upstart goes the distance WorldCom: A company with humble roots aims to acquire MCI and become the second largest long-distance company in America, after AT&T.

November 16, 1997|By Mark Ribbing | Mark Ribbing,SUN STAFF

On Monday, the Dictionary of Household Names got an unlikely new entry -- WorldCom.

The company -- relatively unknown until the last few weeks -- announced it was taking over phone giant MCI Communications Corp. The $37 billion merger, if approved, will be the biggest in U.S. corporate history.

A takeover of MCI would make WorldCom the second largest long-distance company in America, trailing only AT&T. The merger would also give WorldCom Inc. a strong position in other key areas, such as local telephone, data network and Internet services. It would take the company a big step closer to what every telecommunications firm seeks -- the ability to offer customers a complete bundle of communications services, ranging from calling cards to Internet access.

"They want to be able to go to any large or small company or operation, be it a small business or a hospital, and they want to be able to say, 'We want to be one-stop shopping for you.' MCI fits that approach perfectly," said Tom Burnett, the founder of Merger Insight, a New York institutional research service.

Not bad for a once-obscure Mississippi phone company, although it has left some observers wondering whether this $4.5 billion upstart can swallow the $18.5 billion MCI without bursting.

Its origins are the stuff of corporate legend. Four buddies thought up the company that eventually became WorldCom while sitting at a Hattiesurg, Miss., coffee shop in the autumn of 1983. The original name of the firm, Long Distance Discount Services (LDDS), was supposedly the brainchild of a waitress.

The following year, LDDS sold its first minute of long distance to the University of Southern Mississippi. In 1985, Bernard J. Ebbers, one of the coffee shop conferees, became the company's president and chief executive officer. A former basketball coach and motel operator, the folksy and charismatic Ebbers had a knack for deal making and a willingness to absorb other companies. In 1988, Ebbers acquired Telephone Management Corp., expanding LDDS' services throughout Mississippi and into western Tennessee.

The company was still a tiny speck on the telecommunications map, but the Telephone Management acquisition was a sign of grander things to come. LDDS grew quickly on the strength of Ebbers' shrewd acquisitions and cooperation agreements, establishing itself in markets nationwide. In late 1994, LDDS acquired IDB WorldCom, the fourth ranked carrier of international long distance calls. The following year, the combined company renamed itself WorldCom Inc.

Despite its growth and the globe-conquering pretensions of its new name, WorldCom was scarcely distinguishable from all the other phone companies toiling in the long shadows of AT&T and MCI. That changed with the 1996 acquisition of MFS Communications Co. Inc.

MFS was a local-service phone company that had just bought Internet network operator UUNet Technologies Inc. By absorbing MFS and UUNet, WorldCom took on a new identity as a broad-based communications provider.

"I think that is really the transaction that made them not just another long-distance company," said telecommunications analyst Cynthia Houlton of Utendahl Capital Partners L.P. in New York. "The combination of those assets was really unique. They redefined themselves as a different kind of company."

Such transactions, however, have a cost. WorldCom lost $122 million in 1994 and a whopping $2.2 billion last year, in large part because of the IDB and MFS mergers. The IDB deal helped account for $15 million in direct merger costs and $43.7 million in "reorganization costs" in 1994, while the MFS takeover included a $2.14 billion write-off for research and development that had been made redundant by the merger.

In the months since the MFS deal, WorldCom's acquisition momentum has accelerated. The MCI deal might be the most spectacular move yet, but two other WorldCom takeovers are also awaiting final approval: the pocketing of local-service phone company Brooks Fiber Properties Inc. and the absorption of the network services branches of both CompuServe and America OnLine.

The question is whether WorldCom has finally gotten in over its head. The acquisition of MCI alone would represent a fivefold increase in both revenue and employment. WorldCom's stock has been trading at 75 times projected earnings, a hefty multiple that some might see as a sign of overvaluation. The doubts are reflected on Wall Street, where the company's stock has lost 11 percent of its value since the announcement of the $51-a-share stock and cash deal with MCI.

For now, analysts seem guardedly optimistic about WorldCom's ability to digest its most recent acquisitions.

"It's hard to imagine that every single part of all of these transactions is going to go perfectly smoothly, but I don't really see the management team dropping a ball in a way that would impact the financials," said Houlton.

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