Bt Mci: Still Full Of Knots
Sir Peter L. Bonfield was ready to walk away from the deal on the night of Aug. 21. For five days, the chief executive of British Telecommunications PLC had been renegotiating the terms of his $23 billion bid to acquire MCI Communications Corp. One option was to change the price to reflect an earnings hit that the U.S. company expected from its efforts to crack local phone markets and from its stagnating long-distance business. At 3 a.m. on Aug. 22, the call came from MCI: To save the deal, it would accept a 19% cut in the purchase price. MCI executives also talked BT into a $750 million payment if the deal subsequently collapsed.
Bonfield was matter-of-fact. "We've survived the jolt and moved forward," he said later that day. But even if he can sell the new deal to BT shareholders, he faces a far tougher challenge: making the merger work. BT Chairman Iain Vallance first struck a deal with MCI in 1993 and crafted a sweeping strategy for offering corporations one-stop shopping for communications service around the globe. And Vallance, 54, pushed hard for the MCI merger. But it will be up to Bonfield to make the chairman's vision a reality. "Peter will be the sacrificial lamb" if the merger sours, says a former BT insider.
A SHOCK. Is Bonfield up to the task? While he earns high marks from some BT investors for slashing MCI's price tag to $17.9 billion, the 53-year-old executive's credibility was dented by his apparent failure to foresee the bad news that forced the renegotiation. On July 10, MCI stunned the BT board with estimates that losses associated with its efforts to jump into local calling would hit $800 million this year--double the previous estimates. "What alarms me is that this seems to have come as a complete surprise to BT," says Societe Generale Strauss Turnbull analyst John Tysoe.
So instead of getting a partner that's in top form to lead BT into the critical U.S. market, BT is taking on a $9.7 billion company that faces a slowdown in its core long-distance market and is struggling in its effort to crack new ones. This makes the task of bonding BT and MCI into a seamless, $43 billion global entity far tougher. The companies insist that BT's strong balance sheet and its experience fighting off local rivals in Britain will help MCI break into the $100 billion U.S. local market. And they argue that MCI's bold foray against AT&T in long distance will help BT tackle the entrenched monopolies of Continental Europe. But those benefits depend on a strong relationship between BT and MCI.
More troubling is BT's insistence that MCI will be a growth vehicle. James Dodd, an analyst at Dresdner Kleinwort Benson in London, argues that MCI needs a hefty restructuring. In a recent note to shareholders, Dodd described the MCI purchase as a "potentially disastrous deal" for BT and urged them to vote against it. At the very least, BT won't get the hoped-for earnings kick from MCI quite so quickly. Dan Reingold, Merrill Lynch's senior telecom analyst, estimates that MCI's 1998 earnings will come in at $740 million, 47% less than an original forecast of $1.4 billion.
Reingold figures MCI's local losses could be halved through better management and a strategy shift, but that's not in BT's game plan. Bonfield says he's not planning any management changes at MCI and will stick with its local-market strategy, with the only change being a deeper thrust into markets where competition is less intense. And he insists that the merged company will meet its original target of $2.5 billion in cumulative cost savings by the fifth year.
Bonfield, who signed on as CEO in January, 1996, is new to the phone business. Before joining BT, he spent 15 years as chairman and CEO at the British computer maker ICL. In a symbolic gesture, Vallance gave his spacious corner office to Bonfield when he arrived. But from the start, it was clear that Bonfield would follow Vallance's blueprint for making BT the world's first truly global phone company.
Not long after Bonfield's arrival, MCI approached Vallance with a tantalizing offer. After years of refusing to allow BT to boost its 20% stake, MCI Chairman Bert C. Roberts Jr. suddenly wanted a merger. Vallance and Bonfield were delighted. But some people close to the situation were dubious. Yve Newbold, a former executive at conglomerate Hanson PLC who quit the BT board in June, says: "At Hanson, if someone brought us a deal, we would know there was an agenda." Bonfield and Vallance declined to be interviewed, but BT says that a merger was always a possibility, although the timing depended on the U.S. regulatory situation.
MCI's earnings bombshell heightened suspicions among BT investors. Shareholders "think BT management didn't have a full grasp of what it was getting into with MCI," says Andrew Harrington, a telecom analyst at Salomon Brothers International in London. The new terms help, but "this does not fully restore credibility," says Stan Pearson, investment director at Scottish Widows Investment Management, which has 65 million shares, or about 1% of BT.
HELL'S ANGELS? Abandoning the deal would have been a massive setback to BT's international ambitions. Since the early 1990s, BT has been creating worldwide voice and data networks for top multinationals. It has enlisted 25 equity partners in its Concert alliance with MCI, which serves as its pipeline to the crucial U.S. market. "Without MCI, BT's international strategy is absolutely nothing," says Steve Wallage, research manager for Northern Business Information/DataPro. And going back to square one in search of a new partner would have put BT far behind schedule in fighting other global alliances.
The renegotiation saved the deal, but it may be costly in terms of making the merger work. Morale at MCI plunged after the new price was announced, according to one MCI insider, in part because the lower price makes the shares owned by many MCI employees less valuable. While MCI President Timothy F. Price insists that "there is no morale problem," the merged company plans to set up a $100 million bonus pool to induce top-notch MCI executives to stay.
Bonfield also faces a cultural challenge. BT and MCI insiders openly describe the two companies' differences as "Hell's Angels meets the House of Lords." While BT is rigidly hierarchical, MCI encourages employees to take initiative. BT maps out five-year plans, while MCI can fine-tune its plans monthly as market conditions change. Bonfield, who's not wedded to the BT culture, may pull the former monopoly closer to MCI's style. But BT and MCI still face "immense" integration problems, according to Legg Mason Wood Walker Inc. telecom analyst Daniel Zito, who left MCI's local-calling team four months ago.
BT and MCI have some practice in working together. By most accounts, their Concert joint venture has begun to click. On Aug. 26, Concert announced that it had signed on 13 multinational corporations as customers with contracts valued at more than $135 million over three years. But the venture went through rough times at first: Several big Concert customers say that a year ago, they were being pitched by multiple sales teams from BT, MCI, and Concert for the same services at different prices. And although BT has invested some $1 billion in the service, it says the joint venture will only break even next year.
Clearly, Bonfield has his work cut out for him. He is already doing what he can to psych up his people for the MCI merger. At a road show earlier this year, he was backed up by a rock `n' roll band. And while BT's relations with its employees are sometimes tense because management shrank the workforce by 25% in the past five years, Bonfield is seen as "someone you could have a pint with," says Denise McGuire, president of the Society of Telecom Executives, a union representing around 18,000 managers and professionals. "We can certainly do business with him." BT and MCI shareholders can only hope the same is true for them.