BT to buy MCI for $20 billion

British Telecommunications announced today that it will buy MCI Communications (MCIC) for $20 billion in cash and stock, creating the world's second-largest long distance company and setting the stage for more global communications mergers.

The combined company, to be called Concert, will have annual sales of $42 billion, 183,000 employees, and 43 million customers in 72 countries. The global giant's services will include long distance and local phone service, wireless phone connections, Internet access, videoconferencing, and multimedia services. (See related news analysis)

MCI stock rose 3/4 of a point to $31 in Nasdaq trading today.

Concert will be the world's sixth most profitable communications company, with combined profits of $4.7 billion. It will have headquarters in London and Washington.

"This merger creates the first telecommunications company of the new century," said MCI chief executive Bert Roberts in a statement today. "Financial muscle, global customers and brands, and customer-driven innovation [will] trump the competition as we open up markets both domestically and around the world."

Added British Telecom chairman Sir Iain Vallance: "The complementary strengths and skills of BT and MCI will enable Concert to take full advantage of the tremendous opportunities provided by the forthcoming liberalization of telecommunications markets in the U.S. and Europe."

Roberts and Vallance will serve as cochairmen of Concert, and BT chief executive Peter Bonfield will be Concert's CEO. The company will be governed by a 15-member board, which includes eight directors from BT and seven from MCI.

The companies said they will target the converging communications and information services market that is valued at more than $1 trillion worldwide.

The buyout, which comes as the industry undergoes historic deregulation, is the biggest of four major telecommunications mergers this year and is the first to cut across international boundaries. The trend is akin to the global combinations that occurred after airline deregulation in 1978, although those typically were marketing alliances such as the link between United Airlines and Lufthansa, not outright mergers.

Technology also is driving the consolidation, with wireless phones that allow customers to make calls "anytime, anywhere" and the explosion of personal computers--and now network computers--that link tens of millions of consumers to the Internet. Business travelers are demanding these services too, as air travel now routinely takes them to all corners of the globe.

The buyout caps a relationship that began when BT bought a 20 percent stake in MCI for $4.3 billion in June 1993. In June of this year, BT and MCI announced plans to build the first global Internet backbone, a key part of the deal.

The buyout values MCI shares in the mid-30s, analysts said. MCI's stock closed Friday at 30-1/4, up 5-1/8, in Nasdaq trading. Under the proposed deal, MCI shareholders would receive up to $3.6 billion in cash, as well as 0.54 new Concert shares for every MCI share held.

The merger poses a major threat to AT&T. The world's largest telephone company, with $51 billion in sales and 90 million customers, wasted no time pointing out that the deal must be closely scrutinized by regulators before it closes.

"We believe this proposed merger must get the scrutiny it deserves from the U.S. Department of Justice, the Federal Communications Commission, and the appropriate regulatory authorities in the United Kingdom and Europe," AT&T chief executive Robert Allen said in a statement today. "We would expect that our government would condition any such approval on the complete and unqualified opening of the telcom market in the United Kingdom."

Allen added that BT controls 90 percent of all local phone connections in the UK, saying that equal access to local customers and telephone providers "simply does not exist."

Some analysts speculate that other global phone mergers, such as a combination of Sprint and Nippon Telephone and Telegraph, may follow suit. And within the United States, large carriers also are linking up.

U.S. deals include WorldCom's buyout of MFS Communications, a merger of Bell Atlantic and Nynex, and SBC's proposed buyout of Pacific Telesis. The SBC-Pac Tel deal will try to extend its reach into Mexico too; SBC owns a more than a 10 percent stake in Telmex, the Mexican phone giant.

Telecommunications mergers make more sense than buyouts because they benefit greatly from economies of scale and can leverage profits and cash flow. The BT-MCI deal will generate some $12 billion in annual cash flow, money that can be used to upgrade and expand existing infrastructures.

BT estimated today that the combination would generate an estimated $2.5 billion over the first five years from overlapping services.

Layoffs are a big downside to the consolidation, however. The BT-MCI deal is expected to result in fewer layoffs than many such combinations, because the two companies operate in different countries, but there will be overlap in many administrative functions, and those likely will result in cutbacks.

In addition, from the consumer standpoint, bigger is not necessarily better. Consumers like customized services, and larger combinations sometimes are less sensitive to those needs.