InformationWeek
Defining The Business Value Of Technology
November 17, 1997
WorldCom Wins
Deal to buy MCI creates a powerhouse, but overseas coverage remains a question
The new MCI WorldCom will have mostly fiber-optic, business-oriented local networks in more than 100 cities. Even before the merger closes, MCI and WorldCom will start hammering out agreements to sell each other's local services, the companies said at a news conference last week.
Software maker Cincom Systems Inc. is looking to hand its local telecom business in Chicago to MCI. Bill Dyer, director of IS and technology services at the C
incinnati company, is looking to MCI WorldCom to make a substantial dent in the near-monopoly of local telephone companies such as Chicago's Ameritech. "It's a dent a long time coming," Dyer adds.
MCI WorldCom will also be an Internet powerhouse, with more than 2,000 points of presence and 25% of the overall services market. The carrier will control 49% of the Internet backbone market, one of the areas likely to get a close look by regulators when assessing whether the deal will stifle competition.
The merger will also double WorldCom's long-distance capacity and add the successful MCI Systemhouse systems-integration business, "a WorldCom strategic hole," says WorldCom chief operating officer John Sidgemore. The two companies say they plan to continue to resell wireless services.
Where MCI WorldCom may pull up short is in its overseas coverage. WorldCom is aggressively building a pan-European long-distance network to complement its fiber-optic local networks in cities such as London, Paris, and Br
ussels. But as part of the merger agreement, WorldCom is buying out BT's 20% stake in MCI, effectively yanking MCI from Concert, a BT-led telecom services venture that's formed alliances with providers in markets worldwide. MCI, which has little overseas presence of its own, now becomes a non-exclusive distributor for Concert in the Americas.
"MCI's lacking something that it had before," says Audrey Mandela, an analyst with the Yankee Group. "They're now a distributor rather than a controller."
Global or not, WorldCom and MCI will be busy making sure that the largest corporate merger in history is technically sound. In the past, customers of WorldCom-itself an amalgamation of scores of companies-have complained that acquisitions have led to technical glitches that resulted in network downtime. "It's one thing to slap a new label on a host of services and another getting them to work in coordinated fashion," says Jeff Marshall, senior managing director of communications technologies at Bear, Stearns
& Co., a Concert user.
"The reality comes down to a lot of engineering," adds Allan Ditchfield, CIO of Progressive Insurance Co. and a former chief technology officer at MCI. "Just figuring out how to put together a billing system will be a big deal."
An example of a potential conflict is with the two carriers' frame-relay data services. WorldCom sells its service at a fixed price based on the size of the pipes it's using; MCI's frame-relay pricing is usage-based.
In any case, it's clear pricing is on the minds of customers. Cincom's Dyer, who buys services from both WorldCom and MCI, already is hammering both carriers about better volume discounts.
For Dyer and others, the emergence of WorldCom as a major telecom player is no surprise. WorldCom's recent buying spree has included local network operator MFS Communications Co. and its Internet subsidiary, UUNet Technologies Inc. It also is set to buy the network infrastructure arms of CompuServe and America Online, as well as local phone compa
ny Brooks Fiber Properties Inc.
WorldCom's $51-a-share, $30 billion stock bid for MCI-leaving behind GTE's $41.50 cash offer and BT's prior deal with MCI-doesn't even include the $7 billion in cash it will have to pay BT for its 20% stake in MCI.
Even though WorldCom is doing the acquiring, MCI chairman Bert Roberts will be the new MCI WorldCom chairman, with WorldCom's current chairman, Bernie Ebbers, becoming president and CEO. Still, analysts think the deal-making Ebbers will run MCI; the MCI WorldCom board will consist of a majority of WorldCom alumni. The new company will maintain headquarters in both Washington (MCI's) and Jackson, Mississippi (WorldCom's).
Progressive's Ditchfield would prefer one headquarters. "Two headquarters sets up a cultural battle," he says. "These guys are natural fighters to begin with. They need to segment out who's doing what as quickly as possible."
he $37 billion merger deal between WorldCom Inc. and MCI promises to sow a strong alternative to the Bells in many local telecom markets. But big questions remain about the combined carrier's coverage outside the United States now that U.K. carrier BT is out of the picture. And it's unclear just how quickly the two companies can integrate their networks, services, billing, pricing-even their corporate cultures.
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