CLINTON — With no dial tone between WorldCom and Sprint, how does the nixed $129-billion union affect its employees, shareholders and the business community?
“I am sure there is a bit of disappointment among WorldCom people that this deal is not going to happen in its current structure,” said J. Harmon Bays, financial advisor with Legg Mason Wood Walker Inc. in Jackson. “At this point, it will be interesting to see what direction senior management takes the company. WorldCom continues to need a wireless division which was one of the primary reasons for acquiring Sprint.”
On June 27, the Justice Department sued to stop the merger of the No. 2 and No. 3 largest phone companies in the nation, and operators of the two largest international online networks, or Internet backbones, saying the WorldCom/Sprint deal would not bode well for consumers. The lawsuit, filed in the U.S. District Court in Washington, asks for a permanent injunction to stifle the union, saying the combined companies’ long distance and Internet service could reach as much as 60% of the market.
The merger notification was quickly withdrawn from the European Commission, but on June 28, EU’s regulatory body announced it would formally oppose the merger anyway. Company officials insisted the proposal was still viable in the U.S.
In the days following the news, Clinton-based WorldCom issued only two statements. After being advised that the Justice Department intended to file suit to block the proposed merger, Michael Salsbury, WorldCom general counsel, said, “WorldCom will promptly review its options with Sprint.” After learning of the European Commission’s position, Salsbury said, “If, in the future, the parties decide to proceed with the merger, they will make such notifications as are appropriate under European merger laws.”
“Beyond the statements, we haven’t said anything in terms of next steps or possible impacts,” said Peter Lucht, WorldCom spokesperson.
Raymond J. Keating, chief economist of the Small Business Survival Committee, called Justice Department actions “stepping up its activism another notch by blocking the deal.”
“Whenever government bureaucrats dictate how an industry develops, it sets a very dangerous precedent,” he said. “And it is particularly worrisome when the plodding hand of government smacks cutting-edge industries like telecommunications.”
Two problems in wake of decision
The dilemma leaves WorldCom with two vexing problems — no wireless strategy and voice service revenues that account for 54% of its $38 billion in revenues, said Stacey Wall, president of Pinnacle Trust in Ridgeland.
“WorldCom’s focus and primary goal was to acquire Sprint PCS,” Wall said. “This is not a cheap proposition. However, it would provide WorldCom with a lock on the premiere global integrated-broadband communications provider. If WorldCom can hold on to the current agreement with the option to acquire PCS at a 10% premium to the share price in several years, it would be a home run.”
The uncertainty of the pending merger had left a big cloud over WorldCom stock, but soon after news of the Justice Department and EU actions hit the wire, WorldCom stock rose $2.188 to $39.688, while Sprint stock fell $1.188 to $58.375. By the end of the week, WorldCom stock had climbed to $45.88.
“We were hoping the deal with Sprint would go through because the addition of Sprint’s assets, and particularly its wireless Sprint PCS network, would be a great fit with WorldCom’s other key strategic assets,” said Ashby Foote, president of Vector Money Management in Jackson. “But since it didn’t, the market has reacted favorably to that.”
How did the company’s 77,000 employees react to the merger?
Ronald E. Drabman, director of training and psychology programs at the University of Mississippi Medical Center in Jackson, said, “Initially WorldCom employees were somewhat relieved that the deal did not go through because when your company is in play you always wonder if it is you that will be downsized. However, with the rumors that WorldCom will be sold, anxiety is much increased.”
Shortly after the MCI/WorldCom merger, customer service jobs were cut back, which, some analysts say, led to a lack of communication between the company and its customers and resulted in a less-than-spectacular reputation. A 10-day outage on WorldCom’s frame-relay network last August increased public anxiety about the proposed merger.
“From comments I’ve heard from management, WorldCom is going to forego any other acquisitions over the near term, and focus instead on the strategic assets they’ve already got and how to unleash shareholder value from those,” Foote said. “There’s a lot of potential because they have key strategic assets in the communications sector, particularly the Internet backbone.”
If the company pursues a plan to buy a wireless company, analysts predict only two likely targets: Reston, Va.-based Nextel Communications and Bellvue, Wash.-based VoiceStream Wireless Corp. Both companies have seen their stock prices soar in recent months because of the tremendous growth rate of wireless services. Last year, reports indicated WorldCom walked away from negotiations with Nextel when the price of the company climbed too high.
“It is still possible that WorldCom could make a bid at another wireless provider such as Nextel Communications,” Bays said. “They may elect to spin off their consumer long distance business and focus just on the business market, which is their strength. Finally, they may choose to do nothing for the time being and just proceed with business as usual. Whatever happens I have complete confidence that management will make the right choice for their shareholders, employees and customers.”
Marshall Roddy of pennyPI in Ridgeland said the situation leaves WorldCom in a vulnerable position.
“They could find themselves being the pursued,” Roddy said. “There are other predators who have equally sharp teeth — and large wallets.”
Contact MBJ contributing writer Lynne Wilbanks Jeter at firstname.lastname@example.org or (601) 853 3967.