Worldcom + Mci: How It All Adds Up

Is the price right on the biggest merger in history?

It was close to 10 p.m. on Sunday, Nov. 9, when WorldCom Inc. CEO Bernard J. Ebbers got the phone call from Bert C. Roberts Jr., chairman of MCI Communications Corp. Ebbers, in jeans and cowboy boots, had been meeting with his board in the New York City offices of WorldCom's attorneys, Cravath Swaine & Moore. He left the room to take the call with WorldCom COO John W. Sidgmore and an investment banker. "We're ready to do this," Roberts says he told Ebbers. "It would just be easier at a higher price."

At that point, many other executives would have balked. Just 48 hours earlier, on the phone with Roberts, Ebbers had offered what he thought would be an unbeatable deal--raising his bid for MCI to $50 a share in stock from $41.50. That trumped the standing $32-a-share bid by British Telecommunications PLC and the $45 per share GTE Corp. said it could scrape together after first offering $40. Ebbers didn't blink. He quickly agreed to $51 a share, turned to Sidgmore and silently gave a thumbs up. With that, Ebbers sealed the deal to buy MCI for $37 billion--the largest merger ever.

But at what price is Ebbers making history? WorldCom is offering 13% more than GTE and 23% more than it first planned to spend. And WorldCom will have to pay close to $7 billion in cash for British Telecom's 20% share of MCI, and $465 million to induce BT to walk away from MCI. The day the deal was announced, WorldCom's stock fell 2 1/8, to 31. "Maybe I gave in too easy," said Ebbers with a broad smile in an interview after the merger was announced.

CLOSE SHAVE. Indeed, Ebbers' generosity will cost WorldCom shareholders. The $7 billion increase in WorldCom's bid will be paid for with debt that will add roughly $325 million to annual aftertax interest payments, analysts say. That will shave about 17 cents a share from earnings. "The WorldCom shareholder may have to tighten his belt for a year or two as the company digests MCI," says David Otto, an analyst at Edward Jones. The new debt could also hurt WorldCom's ability to finance future expansion.

Before that, the deal still has to go through. And, given the volatility in WorldCom's stock, that's not certain. WorldCom closed at 28 15/16 on Nov. 12, below the $29 a share that makes its MCI offer worth $51 a share. If it falls further, MCI shareholders might consider other bids, especially if the deal drags out until late 1998. "GTE can't possibly be out of this," says Tom Burnett, founder of Merger Insight, which provides research on big corporate takeovers. "The market is extremely volatile. They just need to hang around and see if WorldCom's stock falls." GTE CEO Charles R. Lee says he can't justify $51 a share. But sources close to GTE say the company could bid in the high 40s, and it's still running the numbers.

Ebbers says the numbers will prove his deal adds up. After his initial bid, WorldCom peered into MCI's books and pinpointed savings for a merged company. WorldCom now estimates it can save $20 billion over five years, instead of the $15 billion it originally estimated. A big chunk of that comes from international line costs: by taking advantage of MCI's lower costs in foreign countries, WorldCom will be able save $3.4 billion over five years, instead of the previous estimate of $800 million. Capital spending can be cut by $2 billion, Ebbers figures, up from his original estimate of $1.5 billion--largely because the combined companies will save $400 million yearly on information technology.

Not everyone buys WorldCom's math. "They're being optimistic," says Steve Koppman, a senior analyst at Northern Business Information. Still, most analysts think the cost estimates are solid. They note also that WorldCom has cut some cost savings estimates, such as domestic line expenses. And the company hasn't included potential revenue increases from combining the two companies. "I still like the company's prospects," says Jeffrey Adams, a partner in Denver Investment Advisors, one of WorldCom's largest shareholders. "I think the math makes sense."

Ebbers has no doubt "even in the worst circumstances" that the deal will close. If WorldCom's stock holds up and Ebbers can persuade shareholders and regulators to back the deal, the price for making history is right.

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