WorldCom snags telco in mega-merger

It seems only fitting that the new telcos on the block would be the first to band together and lead the charge into the future of telecommunications.

Last week, the fourth-largest long-distance company, WorldCom, anted up $14 billion to buy competitive access provider MFS Communications, which recently bought international Internet service provider UUNet. The proposed new company, to be called MFS WorldCom, is the first melding of long-distance, local, Internet, data and international services under one roof.

Since the Telecommunications Reform Act of 1996 passed, barriers have been falling between all different types of telecom companies. Interexchange carriers are getting into local service, and local exchange carriers are offering cable. Still, the telcos and cable TV companies have retained their identities as such.

MFS WorldCom would be the first company to blur the telco/cable line and form a general communications company.

Internet pioneer Marc Andreessen, Netscape Communications co-founder and senior vice president of technology for the company, said the future success of telecom companies is in providing the best all-around content and service. The traditional way of thinking in terms of separate companies providing separate services is gone, he said.

"The MFS deal should light a fire under those [traditional-thinking] people," Andreessen said.

Telecom analysts agreed and praised the deal for its seemingly perfect fit.

WorldCom, MFS and UUNet have a strong corporate customer focus, are aggressive and competitive companies and are interested in the latest and best technologies, said John Ryan, principal with Ryan-Hankin-Kent in San Francisco.

"Both MFS and WorldCom were already major players, but the resulting company is wonderfully well-positioned to offer end-to-end services," Ryan said. "They're positioned to be not a number four player in somebody's market but a number one player in anybody's market."

JoAn Couche, analyst with Dataquest in San Jose, agreed that MFS' and WorldCom's aggressiveness, respected international reputations and combination of services creates a powerful market force.

"Even AT&T should be somewhat concerned," she said. "AT&T has learned a lot about being competitive in the past five to 10 years, but the regional Bell companies haven't had to." MFS WorldCom will have an immediate advantage over the competition because it will be able to offer end-to-end service immediately, something the Bell companies can't do.

"It's ironic in the fact that WorldCom and MFS operating in their markets mean that they have real competition, but the [RHCs] will probably lose customers to them in the time before getting started," Couche said.

WorldCom and MFS officials expect the telcos with whom they have call delivery or interconnection agreements-GTE and Ameritech-to be pleased with the merger.

Rob McCoy, president of GTE's long-distance unit, which resells WorldCom Network Services' long distance, said, "With the combination of capabilities of the three companies, there could be an opportunity for us to expand our reach and our products that use WorldCom."

Broadband capability for businesses and a broader, higher volume relationship are two possible benefits, he said.

The proposed merger has only been in the works for two weeks, said Bernard Ebbers, president and chief executive officer of WorldCom and designated president and CEO of MFS WorldCom.

"From WorldCom's point of view, we look out a few years and see a few providers with the capability to offer bundled services," he said. "If we can keep it all within one company, even to the extent that it's international-and that's an important part of this deal-we have an advantage over someone else."

The bulk of the $14 billion payment is a stock swap, with each share of MFS stock exchanged for 2.1 shares of WorldCom.

The merged company will have annual revenues of about $5.4 billion and more than 500,000 worldwide business customers. WorldCom and MFS expect the merger to be completed in four to eight months, subject to stockholder and regulatory approval.

Still ahead, both companies have a huge amount of re-engineering work to integrate back office billing and infrastructure, said Beth Gage, broadband consultant with TeleChoice, Verona, N.J.

Ryan said other possible, but minor, problems could be that the organization is too decentralized with five or six major company sites and that it has a data business overlap of MFS Datanet and WorldCom.

-West Coast Bureau Chief Chris Bucholtz contributed to this story.