MCI suitor WorldCom Inc. buffed its nails, shined its shoes, and spritzed the Binaca on Thursday, announcing an earnings report that potentially makes its offer of US$30 billion in stock for the long-distance pioneer more alluring.
WorldCom beat analysts' estimates by a penny a share, reporting third-quarter revenues of $1.14 billion, a 66 percent increase over the third quarter of 1996. Earnings were $106 million. But how will today's good news affect WorldCom's unsolicited bid for MCI, that pricey contest that also includes GTE and British Telecom?
Telecom analysts say that MCI has been remarkably tight-lipped during its four-week deal-evaluation period. No one seems to know what MCI is thinking, but Thursday's earnings report may hint at a sweetening of WorldCom's offer - as the company may be able to lace its $30 billion stock offer with some cash. "That would put them a bit of a leg up," said David Cooperstein, an analyst with Forrester Research, "but I don't think it's a deal-maker or -breaker."
Some say that WorldCom's 66 percent revenue increase over the same quarter last year shows that the Jackson, Mississippi, company is doing a good job of integrating its acquisitions, which include MFS Communications and its UUNET subsidiary, Brooks Fiber - and Compuserve's ANS.
"This shows that they're getting some synergy out of their purchases - it's not just about buying revenue," said analyst Dan Taylor of the Aberdeen Group. "Any company that grows revenues at 66 percent has managed to keep their act together and do a pretty good job."
But there are two camps about WorldCom's ability to swallow so many companies in such short order. Gartner Group analyst Eric Pawlak says WorldCom has traditionally had trouble maintaining acceptable customer-service operations within companies it acquires. "WorldCom doesn't have a good track record with integration," Pawlak said.
And Paul Kagan Associates analyst Sharon Armbruster points out that an acquisition of MCI, should it be approved by the directors, shareholders, and regulatory authorities, would be of unprecedented size for WorldCom. The company is just slightly more than one-third the size of MCI in revenues, but its market cap is about twice that of MCI's.
"Integration will be a big challenge for WorldCom," says Armbruster. "They're not buying another entrepreneurial, fast company. MCI may be one of the most entrepreneurial of the long-distance companies, but it's still a big, bureaucratic organization."
WorldCom's statement accompanying the earnings report contained just one comment about the MCI bid. WorldCom CEO Bernard Ebbers was quoted as saying, "I'm particularly pleased that we continue to demonstrate impressive growth at the same time we are engaged in important merger discussions and analyses."
Analysts said that in the event that WorldCom's bid for MCI isn't successful, the company will waste little time in continuing its spending spree. "I don't think MCI is their only play," said Taylor at Boston's Aberdeen Group. "I'm sure they've got an alternate strategy if that doesn't work."
While WorldCom's all-stock offer for MCI puts it at the mercy of the skittish stock market, it's impossible to predict what WorldCom's stock will be worth if and when MCI decides to accept the offer. "What matters is the value of WorldCom stock when the deal is done," said Taylor. He and others said they expect WorldCom to adjust its bid to remain competitive.
Despite the solid earnings report, WorldCom stock sank 1 1/16 with the rest of the market. Over the coming weeks, WorldCom execs are expected to meet with MCI to try to persuade it to abandon its planned merger with BT.
For now, though, the normally outspoken telecom analysts are relatively quiet. "It's hard to ascertain what's happening inside of MCI," said Taylor. "This is the sort of thing that's really out of our hands. There's nothing to analyze, because there's no information."
While Forrester's Cooperstein compared the suspense to the ongoing jury deliberations in the Boston murder trial of a British au pair, Taylor was a bit more blasé about the outcome of WorldCom/GTE/BT/MCI: "I figure one day I'll come into work and there will be an announcement."
