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Many questions swirl around momentous merger

The puzzling reality of MCI WorldCom

Is MCI WorldCom going to become a reality? And if it does happen what will it really mean for the telecommunications industry?

As of last week, both of those questions drew some puzzled responses that mostly fell in the “it’s really anybody’s guess” category.

Although there were unresolved issues hanging over the entire WorldCom/MCI merger as both companies wrapped up their pitch to the European Commission’s antitrust hearing, the public appeared to be responding with enthusiasm. Both MCI’s and WorldCom’s stocks edged up last week following the hearings in Brussels and were both trading near their respective 52-week highs of $45 per share for WorldCom and $53 per share for MCI.

“We’re saying our merger will close in the summer,” said John Sidgmore, WorldCom chief operating officer and CEO of WorldCom’s UUNet Internet provider unit.

“I don’t think we lost any ground at the hearing,” he said.

While it may be several more weeks until a ruling comes down, some European analysts were agreeing with Sidgmore and predicting the $37 billion merger would be given the go-ahead.

The commission rarely blocks mergers or acquisitions, but it can impose conditions usually in the form of asset sell-offs.

The hearing organized by the European Commission focused on whether the combined firm — dubbed MCI WorldCom — would dominate the Internet as feared by rival GTE.

To possibly placate regulators, it was being reported last week that MCI was shopping around its Internet business. The New York Times reported last Tuesday that MCI’s domestic wholesale and trans-Atlantic Internet business could bring in close to $500 million and added that the company was not considering selling its retail Internet unit.

Armed with all the facts and figures, the commission will now prepare a draft decision which will be submitted to an advisory committee of competition experts from the 15 European Union states next month.

The commission must give its final verdict by mid-July.

Ram Kasargod, a research analyst with Memphis-based Morgan Keegan & Co. who follows WorldCom, said while he couldn’t predict for sure whether or not the commission would approve the deal, Kasargod said from Morgan Keegan’s standpoint things looked positive.

“If we thought it would be opposed we wouldn’t be recommending this stock,” Kasargod said.

Even if approved by the European Commission, the Federal Communications Commission still has to weigh in and it is presumed the likes of British Telecom, the rejected suitor of MCI, will voice strong opposition, as will GTE.

Why there should be any opposition by the FCC to the merger is unclear from Kasargod’s standpoint.

The whole reason this deal is possible, he posited, is simply the fallout from the Telecommunications Act of 1996, which was pushed by the FCC. So, in fact, the merger represents some of what the act was intended to do: “More competition in the telecommunications industry.”

“Our position is that the WorldCom/MCI [merger] brings competition to the phone industry,” Kasargod said.

More precisely, what the merger will create is a company with a significant, if not nearly dominant, position in the Internet market, many observe, with MCI WorldCom having at least 40% of the Internet infrastructure.

Dave Sieg, a former Internet service provider owner, a technology pundit and president of ZFx graphic designs in Kingsport, Tenn., said should it happen the merger will serve as “a real wake-up call” for the likes of AT&T and other dominant phone companies who have been charging exorbitant prices for their service.

“It’s just a question of how long people will be able to keep prices up to pay for all of those mergers,” Sieg said.

Voice traffic, Sieg and others have noted, is becoming nearly insignificant when compared to data travelling over the current bandwidth available. In fact, voice traffic will become so insignificant in the future that it will be treated almost like a perk and given away for signing-up for Internet service.

“I anticipate the day when long distance will actually be free,” Sieg said.

On Sieg’s Web site — www.davesraves.com — he has a quote from Sidgmore that helps put it into perspective.

“The Internet is not about being 10% better or 10% cheaper. It’s about being 10 times better AND 10 times cheaper. Think about the vulnerability of the core telecom companies. What’s at stake is not the $20 billion voice market, it’s the $900 billion market worldwide. That’s why all the telecom companies worldwide have scrambled to derive Internet strategies.”

In his keynote address at the industry trade show NetWorld+Interop May 8, Sidgmore said thanks to the Telecommunications Act of 1996 and the rise of the Internet, consumers will see prices fall and new services emerge. Consequently, so will new leaders in the telecommunications industry.

“Twenty years from now, people are going to look back at this time as the golden age of communications,” Sidgmore said.

“To the old order in telecommunications that has ruled for 100 years is being overturned,” he said. “This is a world where agility wins, where speed to market wins. New players will shake up the industry. The telecom industry is up for grabs.”

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