From: technews <technews@ou.edu>
To: "'it-fyi@listserv.ou.edu'" <it-fyi@lists.ou.edu>
Subject: it-fyi: MCI Worldcom to Acquire Sprint (NY Times on the Web)
Date: Tue, 5 Oct 1999 08:50:31 -0500
October 5, 1999
MCI Worldcom to Acquire Sprint in Stock Swap Valued at $108 Billion
By LAURA M. HOLSON and SETH SCHIESEL
MCI Worldcom Inc., the nation's second-largest long-distance telephone
company, has agreed to acquire the Sprint
Corporation in a stock swap valued at $108 billion, people close to the
talks said Monday. The boards of both companies approved the merger Monday
night.
The deal, which is expected to be announced Tuesday, would be the largest
acquisition in corporate history and caps a days-long takeover battle for
Sprint, the nation's third-largest long-distance company. Sprint had been
discussing a merger with MCI Worldcom for two weeks but received a $100
billion unsolicited offer on Saturday from BellSouth, the Atlanta-based
regional Bell company, prompting MCI Worldcom to raise its bid Monday.
BellSouth agreed to raise its bid Monday, but the extra cash it offered was
not enough to sway Sprint's board.
Combined, MCI Worldcom-Sprint would still be smaller in terms of revenue
than the AT&T Corporation.
The deal is the latest in a growing list of multibillion-dollar takeovers in
the whirlwind telecommunications industry. Unleashed by the
Telecommunications Act of 1996, deal-making has led the seven original Baby
Bells to agree to become four and, now, the four biggest long-distance
companies agree to become two.
While a merger of Sprint and MCI Worldcom is not likely to be blocked by
regulators, the companies may have to divest themselves of some assets.
William E. Kennard, chairman of the Federal Communications Commission, has
expressed concern about deals that reduce competition.
Top executives at most big carriers believe that the communications
landscape of the next decade will be dominated by a mere handful of global
behemoths, and they all want their companies to become one, or at least
merge into one. They want to be able to offer the full panoply of local,
long-distance, wireless and data services, and they want the geographic
scale needed to serve the far-flung offices of big business customers, if
not always rural consumers.
No matter where they live, consumers are not likely to notice much immediate
effect from the deal. Long-distance telephone prices have been falling
consistently even as -- but not necessarily because -- consolidation has
swept the communications industry.
William T. Esrey, Sprint's chief executive, had favored a merger with MCI
Worldcom all along, people close to the talks said, in part because he
believed that an MCI Worldcom-Sprint combination would have a better chance
of being approved by regulators as well as offer more attractive growth
prospects. It also gives MCI Worldcom the nationwide wireless operation of
Sprint, a crucial tool in competing with AT&T, which has a national wireless
network of its own.
A combined MCI Worldcom-Sprint would probably have a faster growth rate than
AT&T, based largely on the strength of MCI Worldcom's robust data
communications unit. But AT&T would have the lead in offering interactive
television and high-speed Internet access to consumers, based on AT&T's
strong move into the cable television industry over the last 18 months.
BellSouth, executives close to that company said, will re-evaluate its
options and it is unlikely that it will make a hostile offer for Sprint in
the short term.
That Sprint came to be the object of a struggle between the two companies
was something of a surprise to industry experts. People close to the talks
said Bernard J. Ebbers, MCI Worldcom's chief executive, was informed by
advisers in July that Esrey was interested in discussing a deal with him.
Esrey had been approached by other suitors, among them Ron Sommer of
Deutsche Telekom of Germany, which had long coveted Sprint and had
approached Sprint about a friendly merger.
But it was not until mid-September that discussions between MCI Worldcom and
Sprint began to take shape. Sprint has two separately traded stocks: one for
its local and long-distance business, the other for its wireless business.
MCI Worldcom is offering a little more than one share of its stock for each
Sprint share in its local and long-distance business, valued Monday at about
$76, or $68.4 billion. MCI Worldcom will also swap shares of its own stock
for shares in the wireless company valued at $33.7 billion, offering
investors a premium of 0.1547 in MCI Worldcom stock, or $5.4 billion.
To add to that, MCI Worldcom is offering price protection to Sprint
shareholders in case MCI Worldcom's stock price plummets.
BellSouth, however, which serves millions of customers in the Southeast, may
not be protected from the consequences of its failed bid.
In many ways, BellSouth's run for Sprint resembles the GTE Corporation's
failed bid for the MCI Communications Corporation in 1997, at least so far,
and not just because the opponent each time was Ebbers of Worldcom. If the
parallel continues to hold, BellSouth may find that in some ways making a
takeover offer and failing can be worse
than not making an offer at all.
Like GTE, BellSouth has tried to break up a deal between Ebbers and a
long-distance carrier in his sights. GTE announced an offer for MCI in
October 1997 that was financially superior to the offer Worldcom then had on
the table. Worldcom succeeded in outmaneuvering GTE by quickly raising its
bid and then giving MCI limited time to consider it. Rather than bet that
Worldcom's offer would remain valid past the deadline Ebbers had set, MCI
accepted Worldcom's higher offer before GTE was able to respond.
But GTE was not able to simply walk away unscathed. For months leading up to
its offer, GTE had been telling investors that it could survive, and thrive
on its own. But many investors thought GTE gave the lie to that theory by
putting up about $30 billion of their money in a bid for MCI. GTE then found
itself pressured in some ways to make a deal to "make up" for the loss of
MCI. When the company said last year it had agreed to be acquired by the
Bell Atlantic Corporation, GTE's shareholders got no premium over the
existing value of their stock.
Similarly, BellSouth has maintained for years that it does not need to make
a big deal to remain successful, even as telecommunications elephants mate
all around it. Now that BellSouth has offered to pay about $100 billion for
Sprint, investors may wonder how much confidence BellSouth's executives have
that they can in fact go it alone.
Just as disturbing, many investors who bought BellSouth's stock on the
expectation that BellSouth itself was looking to be acquired may now find
themselves looking at a company that is instead willing to make acquisitions
that could reduce its earnings.
"This will likely surprise many investors, as many have assumed that
BellSouth was a seller and not a buyer," said Eric Strumingher, a
telecommunications analyst for Paine Webber.
The upshot is that BellSouth's stock may suffer in the long run -- though in
the near term the shares may well make up some of their recent losses.
"The acquisition premium will come out of the stock," Strumingher added,
referring to the higher price that some investors will pay for the stock of
a company that they believe will be bought.
In addition to the fact that MCI Worldcom offered Sprint more, in the end
that deal appeared to be more of a sure thing for Sprint in at least two
ways.
First, it would take years of uncertainty, in the most likely scenario,
before BellSouth could complete an acquisition of Sprint. BellSouth is not
allowed to sell long-distance voice and data services of the sort Sprint
specializes in until it convinces Federal regulators that it has opened its
local networks to competitors. Until it does so, it is prohibited from
owning more than 10 percent of any big long-distance operation.
Bell Atlantic only last month made the first such application that stands a
reasonable chance of being approved, and BellSouth's long-distance
aspirations have been rejected three times. It would be a big surprise if
BellSouth were to win long-distance approval throughout its region in fewer
than two years, and would be no sure bet even then.
Of course, that problem could be eliminated were the companies to sell off
all of Sprint's long-distance operations in BellSouth's territory, just as
Qwest Communications International Inc. has agreed to sell its long-distance
operations in territory served by U S West Inc., which Qwest has agreed to
acquire.
But while Qwest's long-distance operations in U S West territory had revenue
of only about $200 million, Sprint's long-distance sales in BellSouth's
territory, which stretches from Florida to Tennessee and from North Carolina
to Louisiana, would be measured in billions of dollars.
Another potential, though imperfect, solution would have been for BellSouth
to win regulatory approval to acquire Sprint, but only if it put Sprint's
long-distance operations in some sort of trust, under which they would be
run independently of BellSouth's core local-phone operation.
But that would hamper the companies' ability to realize many of the cost
savings that they would hold up as a big financial benefit of a deal,
because they could not fully combine their operations.
Faced with the prospect of either waiting years for a BellSouth deal to be
completed or selling a major chunk of his business, Esrey preferred to go
with MCI Worldcom, which would not face those issues.
To win antitrust approval of any deal between MCI Worldcom and Sprint,
Sprint will probably have to sell its Internet operation, just as MCI did
after it agreed to be acquired by Worldcom. Both MCI Worldcom and Sprint
operate large Internet systems.
Compared with a deal with BellSouth, Sprint's deal with MCI Worldcom also
avoids the prospect of spinning off billions of dollars worth of wireless
properties.
Federal rules meant to promote competition forbid companies to own more than
one big wireless license for a given geographical area and Sprint's wireless
operation holds licenses for almost the entire nation. Those licenses
overlap with BellSouth's in the Southeast. Overlapping wireless units did
not derail SBC Communications Inc.'s pending acquisition of Ameritech, a
deal that is expected to be approved by the F.C.C. this week, but their
overlap appeared substantially smaller.
MCI Worldcom would not have a wireless overlap problem because MCI Worldcom
now owns no significant wireless operation. In fact, Sprint's wireless
business could be at least as attractive to Ebbers as is Sprint's
long-distance unit.
But for all the hurdles standing between BellSouth and Sprint, on Saturday
afternoon BellSouth offered cash and stock valued at $72 a share for
Sprint's local and long-distance assets, plus a premium of $7.25 a share for
the wireless business.
Monday BellSouth's board agreed to raise the premium in its offer for the
wireless business to $11 a share from $7.25, adding another $1.84 billion to
its offer, said one person involved in the talks.
BellSouth also asked Sprint for permission to negotiate with two of Sprint's
largest investors, Deutsche Telekom and France Télécom. BellSouth wanted to
ask the German and French companies to forgo part of their profit,
increasing the amount paid to some other shareholders by $5. Sprint denied
the request.
For weeks, BellSouth had been mulling over whether to make an offer for
Sprint, having made an overture on Thursday for cash and stock worth $68 a
share for the long-distance business. When that was rebuffed, it raised its
offer. Negotiations began in earnest Saturday night when Esrey met with
BellSouth's chairman, F. Duane Ackerman, people close to the talks said.
Ackerman and Esrey departed that night at about 11 P.M. -- leaving bankers
and lawyers behind to hammer out details -- and reconvened Sunday morning.
After the meetings, said people close to the talks, Esrey was not convinced
that BellSouth had the best offer. At about 1 P.M. on Sunday, Esrey and his
team met in midtown Manhattan at the law offices of King & Spalding,
Sprint's legal adviser, for a meeting of the board of directors to discuss
the two offers.
The board's situation was complicated though. Two of its members -- Sommer
of Deutsche Telekom and Michel Bon of France Télécom -- headed companies
that were partners with Sprint in the troubled European venture called
Global One, and each owned 10 percent of Sprint's shares.
The two also had agreements with Sprint that said they could not make a
hostile offer for the company.
Esrey was favoring a deal with MCI Worldcom, in part because, as one person
said, "he was looking for the best five-year growth rate." Much of Esrey's
personal wealth is tied up in Sprint stock.
Believing that France Télécom and Deutsche Telekom executives had interests
that could conflict with Sprint's interests, people at the gathering said,
management asked Bon and Sommer to wait in an adjoining conference room
while they called a meeting of the special committee of the board comprising
10 of the 12 board members.
Bon and Sommer were later invited back into the room, and were told that the
special committee favored the MCI Worldcom offer, people there said. The
board agreed to meet again Monday. They did, and approved the sweetened deal
with MCI Worldcom.