Who's Afraid Of At&T?

For years, the world's big telephone companies have been trying to build up business outside their secure home markets. But most of the efforts have been cautious, if not timid. Everyone, it seemed, was waiting for the other company to make the first major move. Then, suddenly, it was done: On June 2, British Telecommunications PLC agreed to pay $4.3 billion for a 20% stake in MCI Communications Corp. Now, the race is on among telecom companies to do similar deals. The goal: to become one mf the giants that conquer the global telecom market.

The partnership between British Telecom and MCI clearly throws down the gauntlet to American Telephone & Telegraph Co. and its rivals abroad. Although AT&T has been making an aggressive push overseas, it still gets $59 billion of its $65 billion in revenues from the U. S. Now, uith one bold stroke, MCI--AT&T's longtime nemesis--gains the kind of foreign foothold that has long eluded its much bigger rival. And with Britain's principal phone company at its side, MCI suddenly looks like a very powerful adversary. "The combination of the two companies will be formidable," gloats Iain D. T. Vallance, British Telecom's chairman.

25-YEAR HIGH. Indeed, together, MCI and BT have $30 billion in revenues--all in telecommunications services. That nearly matches AT&T's $39.6 billion in service revenues. And the deal puts $4.3 billion in cash in MCI's coffers. Analysts predict that MCI Chairman Bert C. Roberts Jr. will use the hoard to move into mobile phones, cable TV, and other new growth businesses--in competition with AT&T. "Without a doubt this strategic alliance is the most exciting and promising opportunity in MCI's 25-year history," boasts Roberts.

Other big telecom alliances may already be in the making. Even before the BT-MCI agreement became public, AT&T was moving to expand faster abroad. Late in May, it announced nonequity agreements with five non-U. S. phone companies to provide global service--though the group, called WorldSource, lacks European partners. Now, AT&T may move to counter BT on its home turf. One possible ally: Britain's Mercury Communications Ltd.

Meanwhile, other big rivals aren't likely to stand idly by. Among those believed to be looking for partners are France Telecom and Germany's Deutsche Bundespost Telekom. One likely U. S. ally: Sprint Corp., the No. 3 U. S. long-distance carrier, which was put at a disadvantage by the MCI-BT deal. "The battle lines are being drawn," says Richard C. Toole, an analyst with Merrill Lynch & Co. "Everybody's getting into everyone else's backyard."

The alliance between MCI and British Telecom is an indication of how much the old rules of global telecommunications have changed. Vallance says he first approached MCI's late CEO Bill McGowan three years ago about doing a deal. At first, the talk was just of BT taking an equity stake in the U. S. company. The two sides came close to agreement several times, but the talks always fell apart, says H. Brian Thompson, chairman of LCI International, an Ohio long-distance company. Thompson was the key negotiator in the talks in his previous job at MCI. A major sticking point: BT was afraid it would sour its relationship with AT&T, which pays BT huge sums for the completion of calls from the U. S. to Britain.

TAKE THAT. But that worry started to diminish as AT&T became more aggressive abroad. Then, last year, MCI invested in Stentor, a Canadian phone consortium largely owned by AT&T partner Bell Canada. Annoyed, AT&T invested in Bell Canada's main rival, Unitel. Thompson thinks that BT saw that as a signal of a change in the way AT&T dealt with international competition. The growing rivalry began to escalate into a feud when BT asked U. S. regulators for permission to link U. S. customers with Britain and other countries--something only U. S. carriers can do now. AT&T quickly asked British regulators for the same O. K.

With the two companies increasingly battling head to head in each other's markets, Vallance decided to act. Earlier this year, he ran into Roberts at a Paris trade show and revived the idea of a deal. The talks soon got serious. "I think both companies finally realized the mutual benefits of the alliance and how we could make it work," Roberts says.

Roberts and Vallance met several times, including once for lunch at New York's Sky Club. Then Roberts dispatched MCI President Daniel F. Akerson to London to dig deeper. Gradually, Vallance says, the type of deal being discussed expanded into talk of a broad joint-venture company. The deal nearly fell through again over technical issues such as stock valuations. At one point Akerson even checked out of his London hotel thinking the deal had foundered, only to have BT call him back to the table. Eventually, the trouble spots were worked through, and the two companies' boards signed on on June 1.

CULTURE CLASH. Now, they plan to carve up the globe. MCI will market phone service to multinationals in North America, South America, and the Caribbean, while BT takes the rest of the world (table). They are building on a strong base: 40% of the world's top 100 multinationals are based in the U. S., and 13% are in Britain. "BT and MCI are dividing and conquering," says Sean Phelan, an analyst with market researchers Yankee Group Inc. With cash burning in its pockets, MCI is also expected to go on a shopping spree quickly for cable, mobile phone, and other assets in the U. S.

Can the partners make their grand alliance work? There are problems: Their corporate cultures starkly contrast with one another, for starters. MCI is scrappy and entrepreneurial, while stodgy BT still has some characteristics of the British postal system from which it is descended. BT, moreover, has stumbled before in the U. S. Disappointments include its money-losing Syncordia Corp., which runs global phone systems for major companies. Then there's its 20% stake in McCaw Cellular Communications Inc., which never provided the entree to the U. S. it was supposed to. Ironically, AT&T's move last November to buy one-third of McCaw, including BT's stake, helps give BT the cash for the MCI deal.

Despite the challenges, the alliance signals a new level of competition in international telephone service. If MCI and BT can't succeed, there's little doubt that others will.

      A 24.9% stake in a joint networking company that will market communications 
      services to multinational corporations, plus rights to market in North America, 
      South America, and the Caribbean.
      A $4.3 billion infusion of cash that it can use to move into new markets such 
      as wireless communications.
      The right to buy all of British Telecom's U.S. assets.
      20% of MCI's equity. BT agrees not to increase its stake for 10 years.
      A 75.1% stake in the new joint global networking company. BT will market to all 
      of Europe, Asia, Africa, and the South Pacific region.
      MCI's help in turning around its money-losing Atlanta-based Syncordia unit, 
      which runs global phone services for major U.S. companies. Syncordia will be 
      rolled into the new joint venture.
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