The telecommunications giant today nabbed Tampa, Fla.-based Intermedia for $3 billion in stock and an additional $3 billion in debt assumption, beating rival Exodus in the process.
The relatively new industry of managed Web hosting is growing fast, and Beltsville, Md.-based Digex has been at the forefront of that trend, converting itself from a traditional Internet service provider over the past two years. In June, Internet and local phone service provider Intermedia put itself on the market, with the Digex stake as its most attractive asset.
Digex will "retain the culture of an independent company" by not becoming a direct subsidiary of WorldCom, Digex chief executive Mark Shull said in an interview. He isn't concerned about WorldCom's recent stock woes, noting Digex will continue to be traded independently, and the company's rapid growth "will be reflected in Digex's stock."
WorldCom representatives said the purchase of about 55 percent of Digex's equity and 94 percent of its voting interest accelerated by 12 to 18 months WorldCom's move into the managed Web hosting market. With the deal, Digex will be able to market its services to all of Clinton, Miss.-based WorldCom's global clients.
WorldCom's $6 billion winning bid equals about 20 times Digex's 2001 revenue estimate, according to Merrill Lynch. Intermedia turned down an offer of 28 times Digex revenues from Exodus, but Merrill Lynch analyst Tom Watts was not surprised, because that offer was purely in Exodus stock.
"We expected Intermedia to have a preference for cash over stock," Watts wrote in a report, adding that the deal "does, however, point to the potential value of managed hosting companies." Global Crossing is the other significant player in the managed Web hosting market.
WorldCom is expected to sell off some of Intermedia's operations, as the real target of the acquisition was Digex.
Digex's Shull said WorldCom has made it clear that it has no intention of seeking to purchase the remainder of Digex's stock and make the Web hoster a full subsidiary. "It makes sense for them not to do that," he said, noting WorldCom still has control of Digex without that remaining stock.
No layoffs are planned at Digex, despite that the company now can rely on WorldCom's massive global sales force, Shull said. Rather, "we have to continue to grow our sales force," as well as other staff to meet what Digex expects will be sharply increased demand for its services as a result of WorldCom's purchase.
Shull is optimistic the deal will close in early 2001, but noted that there will be some level of federal regulatory review, as WorldCom is purchasing a competitive local phone carrier in Intermedia Communications.
Digex stock has been highly volatile, trading as high as $184 on March 10 and as low as $21.19 on Oct. 1, but over the past four months, the stock has climbed steadily. Digex has seen 164 percent sales growth in the past year, but it has also posted increasingly large losses over the past eight quarters.
WorldCom saw its stock hit a 52-week low of $32.56 on Aug. 11, shortly after the demise of its attempted acquisition of Sprint. In an effort to turn its stock around, WorldCom also has considered a spinoff of residential long-distance services under the brand name MCI, the company WorldCom acquired last year.
Merrill Lynch's Watts continued to list Digex as a "buy," projecting it to reach $110 a share.