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MCI WorldCom may sell services unit

The No. 2 long distance phone company reportedly is trying to unload the computer-network management and consulting services provider.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
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Kim Girard
3 min read
MCI WorldCom's chairman has a vision, and MCI Systemhouse may just not fit into it.

That's why the No. 2 long distance phone company is reportedly trying to unload the computer-network management and consulting services provider--so it can focus its efforts solely on its rocketing telecommunications business.

MCI WorldCom is talking to several potential Systemhouse buyers, yet a source close to the company said a sale is not expected for at least several weeks, and possibly a month.

Analysts said the move comes as no surprise. "Systemhouse has been on the block for six to eight months," said Dean Davison, analyst at Meta Group, a Stamford, Connecticut-based consultancy. "It's been discussed pretty widely."

For one reason, sales at Systemhouse, which MCI WorldCom acquired for $1 billion in 1995, fell 25 percent last quarter. The Systemhouse division, which pulls a large part of its revenue from PCs resold in Canada, is expected to post $1.8 billion in sales this year--a drop in the bucket compared to MCI Worldcom's overall expected $36 billion in revenue for fiscal 1999.

And with Wall Street pressures looming to make profit and growth numbers for the quarter, MCI WorldCom chief executive Bernard Ebbers can't afford to carry a lagging division, analysts said.

Ebbers has told investors that the joint company, the result of Worldcom's recent $47 billion MCI buy, expects annual sales growth of about 20 percent. He's also planning to trim $2.5 billion in costs to boost profits in the coming year.

"Bernie wants to sell it because it doesn't fit his plan," said Jeffrey Kagan, an Atlanta-based telecom analyst. "If Systemhouse made sense to [Ebbers] he'd hold on to it. But he sees MCI as a phone company, not a network [services] company."

Potential Systemhouse takers could include a local or long distance company looking to bulk up service offerings--such as Bell Atlantic, Sprint, SBC Communications, or an upstart such as Qwest Communications or Level 3 Communications, Kagan said.

However, services and consulting giant Electronic Data Systems, which made a failed bid for an alliance with MCI in 1992, is the name most frequently mentioned by industry experts.

According to a recent Washington Post report, MCI is also in talks to ink an agreement with EDS, under which MCI would provide data communications services to EDS customers. In return, MCI Systemhouse would tap EDS's skills to help with the company's internal billing and IT management needs.

MCI WorldCom could use some billing help from EDS, according to one source familiar with the company's back-end systems. In recent months, WorldCom has struggled to integrate multiple systems and customer accounts absorbed through the acquisitions of Brooks Fiber, CompuServe Network Services, and ANS Communications from America Online.

The result has created customer billing problems and "a back-end systems mess," the source said. Representatives from EDS and MCI WorldCom would not comment on reports.

While a deal is rumored, an acquisition could also be in the cards, as EDS's newly appointed chairman and CEO, Richard Brown is expected to shake things up at the company, which has struggled in recent years to revive its stock after splitting from parent-company General Motors in 1996.

Brown, former U.S. head of U.K.-based Cable and Wireless, led a turnaround charge at the telecommunications company, making 21 acquisitions in 29 months.

In a report this morning, Merrill Lynch analyst Steve McClellan said an EDS purchase of MCI Systemhouse would be "a favorable move."

But Davison questioned whether EDS needs what Systemhouse has to offer the company--which would be broader capacity to service midrange networks and LAN desktops.

Systemhouse competes with IBM, EDS, Computer Sciences, Andersen Consulting, and others.

With the sale of Systemhouse, MCI WorldCom seems to be moving in the opposite direction of its No. 1 competitor, AT&T, which last week agreed to buy IBM's global communications network for $5 billion in an effort to build up AT&T Solutions, the company's service and consulting arm.

"Why you would want to give up your service professionals to me is surprising," said Wayne Segal, analyst at Credit Suisse First Boston. But Segal said the company, should it decide to sell, would have a number of takers, considering the shortage of networking skills across the industry.

>Bloomberg contributed to this report.