CLINTON — This was not the usual meeting. That will take place in June.
This was a special meeting April 28th to put the official stamp of approval on the WorldCom-Sprint merger. And, as usual, the room was packed. Bernie Ebbers apologized for the lack of chairs. No one seemed to mind.
First, Ebbers introduced board members and paid homage to the man who started the original company, LDDS. Then, proudly, introduced us to the “most important person in the room” — his infant grandson.
The actual meeting took about 10 minutes. Business was dispensed with quickly, with Ebbers quipping his way through the script. Two ladies in front heard the adjournment motion and turned to me wide-eyed.
“Don’t worry,” I said. “Now, comes the good part.”
With that, the floor was opened for questions, and Ebbers displayed his flair for handling even the most annoying questions with poise and humor. In the middle of all the one-liners flowed information and visions of the future world. That this revolution could be emanating from Clinton, Mississippi, lent a surreal atmosphere to the meeting.
Why does WorldCom want to put themselves through another heavily scrutinized merger? In a word: wireless.
According to Ebbers, there are two driving forces in telecommunications: 1) the Internet, and 2) wireless.
WorldCom has been putting together a business that offers local phone service, long distance and Internet access. It has been developing a fiber optic network to take on the world and has built a marketing/distribution system to handle the sales and billing. But it lacked wireless.
Sprint PCS is the gem in this deal. It is the wireless division of Sprint, and Ebbers is determined to add this gem to the crown. There are only a few obstacles to the merger. Regulators have expressed concern about the dominance of the combined business in the Internet arena.
Sprint PCS will become a division of WorldCom and will be known as WorldCom PCS. But there will be a separate stock class for this division. This is known as a tracking stock, since it “tracks” the performance of that division only.
Wireless requires huge amounts of capital in order to build and maintain the network necessary to compete.
“The WorldCom PCS group will likely continue to experience operating losses and negative cash flow from operations.” And “the WorldCom PCS group’s continuing need for significant capital could adversely affect the earnings and cash flow for the WorldCom PCS group.” These remarks come straight from the proxy statement.
The parent company will loan money to the wireless division to support these needs. In turn, the wireless division will pay interest for the use of these funds. Loans are liabilities, which appear on the balance sheet, not on the income statement. So, this arrangement of a separate stock that acts like a separate company will protect the parent company’s earnings.
But will these requirements of “substantial additional capital” limit or strain the parent company?
Possibly, but if you want to be an Olympic swimmer, you have to get in the water. WorldCom PCS must remain a tracking stock for at least two years, as part of the agreement. The decision to put the two back together again will probably depend on this division’s profitability. The two driving forces in telecommunications under one roof. Amazing.
As I watched that sweet, innocent little boy playing happily, I wondered what changes he would see in his lifetime. And I wondered if he would ever understand how Grandpa Ebbers has changed his world.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is email@example.com.
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