MCI may be new belle of the acquisition ball

Analysts expect the other Bells to pursue MCI rather than get into a messy bidding war with SBC over AT&T.

Feb. 7, 2005 8:00 a.m. PT

4 min read

It was perhaps the worst-kept secret in the $250 billion telecommunications industry: AT&T and MCI have been trying to sell themselves for years.

Now that SBC Communications is buying AT&T, the other Bell operating companies--Verizon Communications, BellSouth and Qwest Communications International--are forced to consider whether to make a competing bid, try to snatch MCI or stand pat.



		Related story SBC to acquire AT&T for $16 billion The deal, which ends over 100 years of independence for Ma Bell, is designed to bolster SBC's sales to corporate customers.

Most analysts had said they expected the other Bells to pursue MCI rather than get into a bidding war over AT&T. The last alternative--expanding their businesses without making acquisitions--means risking falling behind in the race to acquire more corporate customers for phone and data services.

But is MCI a worthy second prize to AT&T?

Despite its woes, MCI has plenty going for it. It emerged from bankruptcy in April 2004 with less debt relative to AT&T and has $5.6 billion in cash on its balance sheet. The chief executive, Michael D. Capellas, has cut thousands of jobs, retreated from the consumer phone market and introduced software services to complement its extensive data network.

MCI is also relatively cheap, with a market capitalization of just $6.5 billion, less than half of AT&T's.



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Yet industry experts say MCI operationally is less impressive than AT&T. The company's share of the corporate phone and data market is roughly half of AT&T's, and is considered by industry analysts to be less efficient than AT&T.

According to Michael Rollins, an analyst at Smith Barney, each MCI employee generates $425,000 in annual revenue, nearly 30 percent less than an AT&T worker. Its profit margins after deducting access charges paid to the Bells and others are 8 percentage points lower than AT&T's. The company also invests far less on its network and operations.

Despite its less impressive performance, MCI still remains a target because other than AT&T, only MCI and Sprint have the heft to sell a full complement of phone and data services to America's biggest corporations, particularly those that operate globally.

Investors, betting that MCI is a probable target, have bid up the company's stock 5.5 percent since Thursday, when news of the SBC-AT&T talks first appeared. Shares of MCI rose 37 cents, to close at $19.68 yesterday. If SBC succeeds in buying AT&T, the remaining Bells will probably scramble for MCI, analysts say.

"If I were to compare AT&T and MCI, AT&T is more valuable," said Raul Katz, the chief executive of Adventis, a telecommunications consultant in Boston. "But there's a herd mentality. The Bells are playing musical chairs and fear being left out."

As a consequence, Katz, like other industry experts, expects MCI to be acquired soon after AT&T is bought, whenever that might be.

The interest in MCI is a boon to its Capellas, who was brought in as chief executive to take the company out of bankruptcy and turn it around. Industry analysts give him high marks for cutting costs. He also began an aggressive sales effort to keep the company's biggest customers while it was operating under bankruptcy protection.

But like AT&T, the company's sales are being eroded by Internet technology, which is making it far cheaper to sell phone and data services. MCI's sales, like AT&T's, have been falling by double-digit percentages for several years, and few analysts expect improvement this year or next.

AT&T's global network is also considered better than MCI's, which has been cobbled together over the years. And while MCI has introduced services like network security products, AT&T is viewed as the market leader in innovation.

AT&T's brand emerged from the downturn in the telecommunications industry relatively unscathed. MCI, meanwhile, has suffered the stigma of having been connected to its former owner, WorldCom, which collapsed after an $11 billion accounting fraud was unearthed there.

"It's not clear there's any secret sauce to MCI, and you have to admit" that the brand is tarnished, said John Hanson, a telecommunications consultant at Mercer Management Consulting.

Still, Hanson and others say that the opportunity to take over MCI's network, large customer list and international connections may be irresistible for one of the Bells.