WorldCom banks on Digex as shareholder suit pends

WorldCom received the approval of the Federal Communications Commission on Wednesday for its acquisition of Intermedia Communications, which brings with it a 55 percent ownership stake in Digex, a leading Web hosting company. WorldCom executives told analysts and reporters at the company's network operations center in Ashburn, Va., Wednesday that Digex will be a key component in the company's plans in 2001 and beyond.

But WorldCom still must survive a suit filed by disgruntled minority shareholders of Digex, who claim the Intermedia acquisition didn't give full value to Digex. Web hosting is one of the three areas WorldCom intends to focus its resources, and executives declined to comment on how they would proceed in the Web hosting market if they were to fail to win the suit. WorldCom subsidiary UUNet offers Web hosting, but analysts at Wednesday's conference said that unit's reputation pales in comparison to Digex.

"WorldCom has a pretty high hurdle to climb" to prevail in the suit, said Current Analysis analyst Edward Kong.

The IP troika
As Chief Executive Bernard Ebbers outlined in November, WorldCom intends to focus on three high-growth industries in 2001 and beyond--Web hosting, Internet Protocol (IP), virtual private networks (VPNs) and Web centers for customer care.

WorldCom's MCI voice service will be designated as a separate tracking stock and grouped with other low-growth businesses. At the conference Wednesday, Chief Operating Officer Ron Beaumont predicted voice would move from 30 percent of WorldCom's revenues at the end of 2000 to "15 percent or less in five years."

Beaumont said WorldCom would leverage its 70,000 terrestrial route miles of fiber-optic networks in the United States, Europe and Asia to become the No. 1 or No. 2 provider in each of those high-growth data businesses.

Competition will be stiff in all three markets, Beaumont said. "Everybody else has also announced service in these markets," he said, but the company remains focused on the larger players, "the AT&Ts of the world," because of the size that will be required to provide end-to-end service.

Other companies that are already in or have announced entry into one or more of these markets are Broadwing, Cable & Wireless, Concentric, Genuity, PSINet, Qwest, Savvis, SBC Communications and Sprint.

WorldCom executives were reluctant to announce financial or other goals for these three services in the coming year. However, Beaumont said that market analysts would begin to see results soon.

"Wall Street is looking for performance," Beaumont said after acknowledging the steep drop WorldCom's stock has taken in the last year. "We need to get a couple of quarters under our belt" and show investors that the company is making improvements, he said.

Beaumont admitted that the company's depressed stock meant that the acquisition pace the company has continued over the last few years--which included the purchases of WilTel, MFS Communications, UUNet and MCI--will have to cool. In addition, the company's failure to win regulatory approval for its acquisition of Sprint, he said, means the company will be looking at "smaller acquisitions" in the future.

Hot for hosting
For now WorldCom just wants to secure the Intermedia acquisition to put in place one of the three components of its new business plan.

"There is not a single company that hasn't stated they're going to be in the (Web hosting) business or is already in it, and who would doubt them," said Vice President for E-Services Ronald McMurtrie. "That's where Digex comes into the picture," he said. "That's why WorldCom is acquiring Intermedia."

In fact, while WorldCom executives wouldn't articulate what they planned to do with most of the IP services Intermedia provides, they in many respects duplicate what WorldCom already is offering.

Beaumont said he was "confident we'll get the deal done," probably in the first or second quarter. But he acknowledged the deal, and the resulting shareholder suit, "is very complicated, with a lot of moving parts."

He said Digex would be WorldCom's Web hosting provider, with existing WorldCom staff serving as sales support. Chief Technology Officer Fred Briggs confirmed that WorldCom would be relying on Digex's existing staff and facilities to run Web hosting centers.