Commentary: What Price Is Right for WorldCom?

For Bernard J. Ebbers, the basketball-coach-turned-telecommunications-mogul, the past few weeks truly have been March Madness. Early in the month, Ebbers' Clinton (Miss.)-based company, WorldCom Inc. (WCOM ), confirmed it was axing nearly 6,000 of its 90,000 workers--the first layoffs in the company's 20-year history. But the cost-cutting wasn't enough to calm debt-rating agency Standard & Poor's Corp., like BusinessWeek, a part of the McGraw-Hill Cos. Given the collapse in WorldCom's long-distance business and sharp slowdown in its Internet traffic, S&P slashed its ratings on most of WorldCom's $25 billion in debt to just above junk status.

But the biggest bombshell came from the WorldCom chief executive himself, who built his company through roughly 70 mergers. After years of insisting his business isn't for sale, Wall Street is abuzz with rumors that Ebbers is finally willing to cash out. Indeed, sources close to Ebbers confirm he might throw in the towel--if he could get $50 a share. That 200% premium over WorldCom's current price of $16.75 would value WorldCom at roughly $150 billion.

NO MORE BUYOUTS. Other news has added to the intrigue. On Mar. 14, shares jumped more than a dollar on word that Ebbers wasn't planning any more acquisitions; Salomon Smith Barney Inc.'s telecom analyst Jack B. Grubman also edged his estimate of annual revenue growth up to 14%. Despite the good news, however, Ebbers' buyout price remains far more than anyone believes the company is worth. "Nobody in his right mind is going to meet his price," says one prominent investment banker.

But Ebbers' outsize demand isn't the biggest obstacle to a deal. Although he's considered one of the industry's consummate dealmakers, the truth is that Ebbers may have waited too long to sell. A year or two ago, WorldCom boasted annual revenue growth of 20%--thanks to the heady 50% gains of its UUNET division, the world's largest Internet-backbone provider.

But problems in the long-distance and Internet markets have sent WorldCom's stock tumbling 70% over the past year, and the worst isn't over. With long-distance rates in free fall, revenues from that division are expected to drop 15% this year, to $6 billion. Meanwhile, the capital-spending slowdown for Internet-related services has also crimped growth. Analysts expect the UUNET division's growth to slow to 18% in 2001.

Until recently, many on Wall Street expected foreign rivals to jump at the chance to acquire WorldCom to gain a foothold in the vast U.S. data market. But Germany's Deutsche Telekom--rumored to be the leading suitor--seems content to digest its acquisition of Voice-Stream Wireless Corp. Others, such as Spain's Telefonica and France Telecom, no longer seem interested.

An offer from one of the Baby Bells also looks unlikely. They can't enter the long-distance or interstate-data market without approval from the Federal Communications Commission. Although access is expected to become easier under the Bush Administration, the FCC has so far given its blessing only rarely.

Moreover, investors seem inclined to punish any Bell that goes near WorldCom. The mere rumor that the company was on the block has sent shares of SBC Communications Inc. down 10% since early March. On Mar. 13, that prompted SBC Chairman Edward Whitacre Jr. to deny any interest in the company.

Publicly, WorldCom executives say they want to go it on their own. "There have been no offers, and there is no activity on selling the company," says WorldCom Chief Operating Officer Ronald Beaumont. Despite that denial, investors believe that Ebbers is dressing up the business for sale.

For starters, WorldCom is issuing a tracking stock for its flagging residential and wholesale long-distance business. If it were spun off, WorldCom's remaining assets would be more attractive. Still, that's a big if. Despite his reputation as a shrewd dealmaker, Ebbers may have missed his biggest deal ever.

By Charles Haddad

Haddad covers telecommunications from Atlanta.

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