Worldphone Inc.?

After this deal, rivals are taking a closer look at their global telecom alliances

British Telecommunications' planned $20 billion-plus takeover of MCI Communications is a bold line in the sand: If the deal clears regulatory roadblocks, as expected, BT will become the first foreign phone company to carry local, long-distance, and international calls for millions of Americans.

BT-MCI, to be renamed Concert PLC, represents the emergence of a truly international phone company, the borderless carrier. The world's other phone carriers have little choice but to respond with cross-border alliances of their own. "A lot of telecom executives around the world are staying up nights worrying about this," says Jeffrey Kagan, president of U.S. telecom consultant Kagan Associates.

BT and MCI's megamerger will attempt to create the seamless global organization that industry experts believe is needed to win the battle for lucrative multinational corporate accounts and to break into new markets. With expected cost savings of $2.5 billion over five years, the merged company will drive down global phone rates. "We were ahead of the wave," boasts BT Chairman Sir Iain D.T. Vallance. "Now, we're making the wave."

The upshot: Customers are willing to reconsider their telecommunications suppliers. "The deal makes BT-MCI a real alternative," especially in the U.S., says Philip Barton, chairman of the European Virtual Private Network Users Assn., a key European customer consortium. That's exactly the payoff BT and MCI are hoping for. With the U.S. barreling toward full competition at the start of 1997, moreover, MCI needs billions of dollars in capital and BT's expertise running local networks in Britain as it tries to break into the $100 billion U.S. local-calling market. In return, BT gets a huge foothold in the U.S. market.

No question, the combination presents formidable challenges. The two companies must meld two vastly different corporate cultures that already were clashing in their joint venture, formed in 1994, a year after BT bought a 20% stake in MCI. "They'll need to find a compromise between the well-run structure of BT and the cowboy structure of MCI," says Lev Volftsun, a former executive at MCI, BT, and the joint venture who is now CEO of Light Speed International Inc., a telecom-software developer.

Already, BT plans to parachute several dozen key MCI managers into its European operations. But more important is the creation of a single sales force. Until now, a corporate customer often was offered different deals in the U.S. and in Britain for similar packages of services. "It was a very confusing model," says Nick White, head of worldwide telecom for Unilever PLC, a customer.

The industry's other consortiums have confronted similar startup pains. AT&T's three-year-old WorldPartners federation of 16 phone companies has been plagued by poor coordination and management changes, while the Global One Alliance of France Telecom, Deutsche Telekom, and Sprint, started in 1994, has yet to make any significant inroads in key European markets outside its home countries.

BT CEO Peter Bonfield started picking up customer concerns shortly after taking the job as BT's new CEO at the start of the year. After reexamining the MCI deal, he flew in late spring to MCI's Washington headquarters to discuss the lack of coordination. The result: Rather than divide the world between them by geographic markets, the two companies decided on a unified approach. In June, BT suggested that they combine their international operations. Shortly thereafter, MCI Chairman Bert J. Roberts Jr. went one better, proposing the full-blown merger.

CONSOLATION PRIZE. Competitive reaction was swift, and negative. AT&T Chairman Robert E. Allen called on the U.S. government to give the deal "the scrutiny it deserves," arguing for greater access to the British market--a consolation prize analysts say it may well win. Executives at France Telecom sputter that the BT-MCI deal is proof that their joint venture was a failure.

One rival, though, has had little to say: Japan's Nippon Telegraph & Telephone (NTT). NTT is telecom's Holy Grail, the partner that can help open booming Asian markets. Japan, one of the most restricted telecom markets in the world, is nearing a decision to restructure NTT in a way that could allow an overseas alliance. NTT already has agreed to a trial with AT&T on voice services, and the two companies have a number of technical joint ventures. But it is unlikely to enter an exclusive partnership, say Japanese analysts, preferring to play the competing alliances off against one another.

Meanwhile, Asia represents a gaping hole in BT's global reach. BT failed in its bid earlier this year to buy Cable & Wireless PLC, which owns 57% of Hong Kong Telecom, a key link to the huge Chinese market. Now, industry sources say BT and MCI execs are rushing to Asia to find another partner. They're also still talking to GTE about a potential venture in wireless or local service. There will be plenty more deals before the dust settles on this newly borderless industry.

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