From Concert to discord, BT/MCI merger problems end carefree prenuptials

MCI put a match to a string of firecrackers when it announced last week that it would incur extra losses of $400 million in the second half of 1997, bringing the grand total to $800 million in red ink this year. The second largest long-distance carrier blamed the loss on problems associated with getting into local market phone service.

Wall Street was shocked, and stocks of MCI and its planned merger partner BT plummeted. BT executives said they didn't realize the extent of the problems, then hinted to the London press that they would call for two key MCI executives' resignations, which BT execs later denied.

A BT shareholder meeting last week revealed more frustration and displeasure. Many shareholders demanded to renegotiate the deal with MCI, claiming they were tricked. A few even called for the resignation of BT's chief executive officer, Peter Bonfield, for overlooking the scope of the problems at MCI. BT Chairman Iain Vallance said the resignation was out of the question but revealed little else about BT's next move.

Why was the MCI write-off such a shock? Both MCI and BT knew that getting into local service would be expensive, and analysts have been saying all along that the first few years of deregulation belong to lawyers.

MCI has been rigorous in informing BT about ongoing financial situations, a spokesman said. MCI actually released the loss statement two weeks earlier than normal because BT execs wanted the numbers out before the annual shareholder meeting, the spokesman said.

"The biggest piece of this has been the response from BT, and I can't really comment on that," he said. "Their reaction has fueled this more than what the story really is.

Analysts believe there is more to the story than losses from getting into local service. Indeed, part of the MCI statement included a drop in long-distance revenue.

"This stuff doesn't creep up on you in a day," said Bob Rosenberg, president of Insight Research, Parsippany, N.J. "Apparently, they underestimated the fiscal resources required, and they're obviously taking a hit in the long-distance business. The two factors together create this wash of red ink.

MCI is positioning itself with the courts and with stockholders, said Christine Heckart, an analyst at TeleChoice. At the same time, the carrier could use the announcement as a way to blame all problems on one thing that is out of its control, she said. Nevertheless, the merger is expected to go through.