CNET también está disponible en español.

Ir a español

Don't show this again

Tech Industry

2HRS2GO: Have faith in Ebbers

Backers of the Telecommunications Act of 1996 can't say they didn't see this coming.

More than a few observers foresaw a wave of megamergers in the wake of the law's loosening of regulations. No one expected a relatively small Mississippi company to lead the way, but Bernard Ebbers has always been one to keep people guessing.

The only thing certain with the CEO of MCI Worldcom (Nasdaq: WCOM) is that he's always looking for deals, having consummated 60 of them to build one of the largest communications empires in the world. If today's reports are true, he's hoping to land Sprint Corp. (NYSE: FON) as 61.

Wall Street doesn't seem to like the idea, judging by today's 5.5 percent drop in MCI Worldcom shares. The market has a point: when your self-generated growth is already adding to leadership or near-leadership positions in long distance, data transport and Internet traffic, buying another telecom company seems excessive.

Have an opinion on this?

Word about negotiations seems especially surprising in light of Ebbers' own public statements regarding Sprint specifically. At a PaineWebber investment conference in June, Ebbers said in so many (actually not so many, he's a blunt guy) words: "Buying Sprint might be a nice idea, but get real. Federal regulators would be all over a merger of the second and third largest long distance carriers."

Perhaps Ebbers -- a Canadian who over three decades has transformed himself into a taller, suit-wearing version of Uncle Jesse from the Dukes of Hazzard -- was just blowing another round of smoke when he said that. But it's also true; the Feds are going to ask how Sprint + MCI improves competition. Unfortunately for proponents of this deal, it doesn't.

Adding Sprint boosts MCI Worldcom's share of the U.S. long distance market to 30 percent from 20 percent, which still leaves it a solid-but-distant second behind AT&T. Adding Sprint's backbone to MCI's would be about as anti-competitive as you can get in that field. Neither company has any significant local phone business.

Ah, but what about wireless? MCI Worldcom has no presence there, while Sprint has PCS. Sounds good strategically, but Ebbers doesn't seem inclined to pay more than $40 billion just to buy a wireless component that contributes a small part of the acquiree's revenue. MCI Worldcom couldn't put together a deal for pure play Nextel, so you have to wonder how Ebbers would pick up a more complicated package like Sprint.

Market analysts love pointing out the wireless "hole" in Ebbers' line-up. They make it sound like the businesses that make up MCI Worldcom's target market are too stupid to read two phone bills. But MCI Worldcom's own growth says otherwise: in the second quarter, revenues rose 16 percent year-over-year from an already huge base, while profits tripled on a pro forma basis. Those are growth rates that AT&T, with its huge wireless network, can only envy.

None of this is meant to suggest that MCI Worldcom shouldn't buy Sprint. If anyone can put together an accretive deal that gets past regulators, Ebbers can. But if he can't, he'll drop it without blinking.

That's why MCI Worldcom shareholders shouldn't worry too much. Ebbers doesn't do these things unless he thinks he can make it work profitably. He hasn't failed yet.

Other issues:

  • Nextel Communications Inc.
  • (Nasdaq: NXTL) Speaking of Nextel, its stock is down today because MCI was seen as a potential acquirer of Nextel. Again -- they couldn't get it done the first time around, and if anything, Nextel's intrinsic value has jumped as its business improved, so why was the market still thinking of an MCI-Nextel deal?

    Wireless remains a huge growth opportunity, and Nextel has plenty of potential partners both domestically and overseas. It doesn't need to be acquired to expand successfully. Too bad the stock isn't cheaper; even with today's decline (for the wrong reasons), a per-share price of 63 and change seems pretty high for a company with no profit on the horizon.

  • C-Cube Microsystems Inc.
  • (Nasdaq: CUBE) A higher price target from Lehman Bros. convinced the market to drive up shares of this maker of video encoders and decoders. As the cable industry moves to open standards, companies like C-Cube threaten traditional equipment suppliers General Instrument Inc. and Scientific-Atlanta, says Lehman analyst Dan Myers. He raised his C-Cube target to 71 from 41.

    Newer players such as C-Cube stand to benefit from the industry's growth, I wouldn't write off GIC or Scientific-Atlanta either; they've got modern products of their own, and customers that are comfortable with them.

    Market indices stayed negative as this week's regular trading neared its conclusion. The Nasdaq Composite Index was down 23.17 to 2726.66, the S&P 500 lower by 3.53 to 1276.88, and the Dow Jones Industrial Average down 29.13 to 10289.46. 22GO>