MCI-WorldCom – Sprint to a finish?

1999-09-28

The possible takeover of Sprint hit another obstacle this week, as the market showed its disgruntlement. Shares in the MCI-WorldCom dropped by 4% on Monday morning alone, to $75 1/16 – things quietened down since then but a dollar was wiped off the share value by end of play Tuesday. And now two companies are saying that the merger could be off at any time. Things are not looking good.

It all boils down to wireless. MCI WorldCom has seen its market pulled out from under its feet over the past year, as the mobile market has well and truly established itself. MCI’s main competitor, AT&T, is a strong player in the mobile market whereas MCI doesn’t have any wireless capabilities. Several players without the long pedigrees of the traditional communications providers, such as Sprint, Nextel (which has also been an MCI acquisition target), Voicestream and PowerTel, are carving up the airwaves: at the same time, due to operational efficiency and better technology, they are able to offer services to corporates at prices that MCI cannot touch. The rhetoric of Bernard Ebbers, CEO of MCI WorldCom, that the company “does not need a wireless business right now” does not match what his feet are doing, namely grasping at an opportunity to buy itself back into the multi-channel future of communications.

Whatever happens, it appears, there will be a storm. If the deal succeeds, it will have to ride out the likely disagreements of both the Justice Department and the European Commission, not to mention the fall-out from its sell-off of a chunk of Internet backbone to Cable and Wireless. It is strongly possible that the merger, if successful, would involve a sell-off of Sprint’s own Internet backbone unit. At the same time, the deal would blow a crater in the landscape of the whole, global telecommunications industry – alliances would need to break and re-form to take the merged company into account.

Should the deal fail (and it is likely that it will), MCI risks losing considerable corporate custom to its competitors, who are already able to provide a more comprehensive portfolio of services. It is difficult to see where the company would go next: Nextel is an option, though things failed last time around. Other companies lack the scale necessary to provide MCI with an integrated offering, although they could be the foundation stone it needs for the future. The communications giant may end up all dressed up with no place to go.

(First published 28 September 1999)