MCI Buy-Out Sets Records (Nov97 Updates)
In the end, greed conquered caution. Over the past 12 years, Bernard Ebbers, a Canadian-born telecommunications mogul who prefers cowboy hats and blue jeans to pinstripes and silk ties, has engineered more than 40 takeovers. But his latest quarry, MCI Communications Corp., was proving difficult to subdue. On Oct. 1, Ebbers's WorldCom Inc. offered $41 billion in stock for MCI, trumping an earlier $27-billion bid from British Telecom PLC. Within days, a third suitor, GTE Corp., entered the fray with a $28-billion all-cash offer. As MCI executives weighed their options, an impatient Ebbers retreated to his sprawling cattle ranch near WorldCom's head office in Jackson, Miss. Finally, on Nov. 7, he phoned MCI chairman Bert Roberts and raised his bid to $52 billion, the largest corporate buy-out in history. Roberts immediately capitulated. "It was typical cowboy fashion," telecommunications consultant Eamon Hoey says. "Ebbers simply took the competition out."
With MCI firmly in his grasp - the deal requires regulatory approval, but few observers believe it will be turned down - Ebbers last week vowed to continue his quest to make WorldCom the country's dominant communications company. Already, it is the second-largest U.S. long-distance provider, behind AT&T. Ebbers himself, however, inspires sharply contradictory reactions. WorldCom's shareholders and many analysts consider him a visionary who is reshaping the telecommunications sector in the same way that General Motors founder William C. Durant transformed the automobile industry 90 years ago by buying up several smaller manufacturers. Ebbers's critics, however, liken him to the corporate buccaneers of the 1970s and 1980s who built huge empires on mountains of debt, only to watch them come crashing down when economic conditions turned sour. WorldCom, they say, is a financial house of cards that will collapse when the inevitable shakeout hits the sector and the company's rapid expansion campaign begins to falter.
While other would-be corporate titans, such as Canadian real estate developer Robert Campeau, used high-yield junk bonds to finance their takeover binges, Ebbers has paid for every one of his acquisitions by issuing more WorldCom stock. So far, the strategy has paid off. But to keep WorldCom paper from turning into the junk bonds of the 1990s, Ebbers will have to ensure that the company's revenues and profits continue to soar. (In the most recent quarter, WorldCom's earnings before taxes totalled $758 million, up from $428 million a year earlier.)
If he fails, MCI investors may wish they had embraced staid British Telecom or accepted the security of GTE's cash offer. "Shareholders should beware of people bringing these kinds of gifts," says Timothy Loughran, a finance professor at Iowa State University who has studied hundreds of takeovers. "It's possible the stock will have a big fall."
In Canada, Ebbers's conquest has given rise to other worries. In 1995, the Stentor alliance of regional phone companies, which includes Bell Canada, B.C. Tel and Alberta's Telus Corp., forged a partnership with MCI under the global banner of Concert Communications Services. Concert, which was created by BT and MCI to market global communications packages to multinational companies, generated nearly $2.8 billion in revenues last year. But David Goodtree, an analyst at Forrester Research Inc. in Cambridge, Mass., says that Concert's future is in doubt as a result of BT's decision last week to sell its 20-per-cent stake in MCI to WorldCom for $9.8 billion.
Other industry observers say that Ebbers's raid on MCI should sound a loud wake-up call at BCE Inc., the parent company of Bell Canada. To compete in the rapidly consolidating global telecommunications industry, analysts say, BCE must forge new international alliances. "BCE doesn't seem to have any focus," says Hoey. "They don't seem to have a strategy."
The MCI deal is the latest in a string of takeovers that Ebbers has put together since 1983. Before discovering his talent for corporate blood sports, the lanky Ebbers nursed dreams of becoming a professional basketball player. After graduating from Edmonton's Victoria Composite High School in 1959, he won a basketball scholarship from little-known Mississippi College in Jackson, Miss. Although he never turned pro, he demonstrated a flair for business after graduation by assembling a string of Best Western Hotels. Always on the hunt for bigger deals, Ebbers and a group of investors launched a small phone company in 1983 to take advantage of the newly deregulated market for long-distance services. Soon, the new company was buying up a series of rivals. Even now, Ebbers is hungry for more deals. "We haven't died yet," the WorldCom president and CEO said last week. "If there are opportunities out there, we won't shy away from them."
WorldCom certainly is a far different company today from the one Ebbers and his partners originally sketched out on the back of a napkin in a diner in Hattiesburg, Miss. The new company, MCI-WorldCom, will boast revenues of $42 billion a year. Thanks in large measure to MCI's vast optical fibre network, it will also control an estimated 60 per cent of all U.S. lines handling Internet traffic. Last year, WorldCom generated $1.4 billion in revenue from its Internet services, but the sector is projected to be worth more than $40 billion in the United States by the end of the century. "MCI and WorldCom have complementary strengths," said MCI chairman Bert Roberts. "It gives us an opportunity for reach we didn't have before."
To keep shareholders happy, however, Ebbers will have to ensure that WorldCom stock continues to climb in value. That will be no easy trick. He says the merged companies can cut $15 billion in costs over the next five years by eliminating duplication. WorldCom could also add to its cash flow by taking over more rivals - provided that U.S. antitrust regulators do not intervene.
Investors and analysts are clearly divided over Ebbers. While some see him as a brilliant strategist, others dismiss him as just another overly ambitious deal-maker. After hitting a high of $55.75 in September, WorldCom stock slumped to $41.80 at the close of trading last week as worried shareholders began to bail out.
Goodtree, for one, is a pessimist. In his view, the merged companies' ability to generate higher revenues will be undercut by falling long-distance rates. Currently, 80 per cent of WorldCom and MCI's combined revenues come from long-distance charges, which have been dropping at the rate of three per cent a year. Shareholders could also be hurt if WorldCom's corporate culture shifts from that of a fast-moving upstart to that of a ponderous telecommunications giant. Goodtree says that as WorldCom buys companies, it quashes their innovative spirit by focusing almost entirely on the revenue-producing side of their operations and cutting back on research and development. Without new products, Goodtree believes revenues will slow and the company's share price will drop. "Where does innovation occur?" he says. "It's not in big, monolithic companies."
History also seems to be against Ebbers. The University of Iowa's Loughran studied 947 takeovers that took place between 1970 and 1989, in each case measuring the performance of the acquiring company's stock five years after the buy-out. On average, shares in the companies whose takeovers were financed solely with stock fell by five per cent. Companies involved in cash buy-outs, on the other hand, saw their shares jump an average of 62 per cent. According to Loughran, cash purchases typically work out better than stock-only deals because the executives of the acquiring company are less inclined to overpay. Moreover, in some cases share bids may be motivated solely by the need to keep revenues up through further buy-outs. If history repeats itself, WorldCom shareholders might be wise to sell now - although Loughran doubts they will. "People are naturally greedy," he says. "Sometimes, you should say, 'I had a great run and I made an awful lot of money,' and then walk away. Instead, they want the game to continue."
Juri Koor, chairman of Toronto-based Call-Net Enterprises Inc. and Sprint Canada Inc., believes Ebbers is correct in his assumption that bigger is better. The more telecommunications traffic that moves through a company's network, Koor says, the more profitable it becomes. In time, Koor foresees a similar wave of consolidation in Canada. "In the long term, it will be like the car industry," says Koor. "There are four or five major international car companies and it will be the same in the telephone business." Ebbers is taking the big gamble that he will be a leader of that elite club.
The Urge to Merge
If it goes ahead, the $52-billion WorldCom/MCI takeover will become the world's biggest corporate merger. The top five to date:
»Bank of Tokyo Ltd. and Mitsubishi Bank Ltd. (1995) $46 billion.
»Swiss pharmaceutical giant Ciba-Geigy AG and Sandoz AG (1996) $37 billion.
»Bell Atlantic Corp. and Nynex Corp. (1997) $35 billion.
»Kohlberg Kravis Roberts & Co., a New York City investment firm, and food-and-tobacco giant RJR Nabisco Inc. (1989) $31 billion.
»Mitsui Bank Ltd. and Taiyo Kobe Bank Ltd. (1990) $27 billion.
Maclean's November 24, 1997