Barred from delivering on his most ambitious merger plans, WorldCom chief executive Bernard Ebbers is shifting his company's emphasis toward the Internet.
Ebbers, fresh from the collapse of the failed Sprint merger colossus, is getting back on the acquisition wagon with today's deal to buy network operator Intermedia Communications, the parent company of Web hosting provider Digex.
Today's Intermedia buy most likely marks a new move toward acquiring companies that provide the data and Internet services that make WorldCom's networks more useful to its customers. Now, with only one glaring exception--the wireless business--WorldCom has most of the network elements it needs, analysts say.
"This is the first of this kind of acquisition," said Jeffery Kagen, an independent telecommunications analyst. "They're moving beyond the network into Web hosting, managed services and other data services. I really don't think they've scratched the surface yet."
For Ebbers, these services are quickly becoming more than just a shiny polish for Wall Street. Rather, managed data services are a critical component for his company, as WorldCom strives to delve into Internet businesses and move away from its reliance on voice revenues.
Five months ago he helped push the company further toward data services with the seeds of a strategy dubbed "Generation D." Executives said then that they were giving the company a "face-lift." Analysts say that for the operation to succeed, Ebbers will have to continue along today's acquisition path.
Under Ebbers' direction, WorldCom has been one of the world's most acquisitive companies during the past five years. It has quickly risen to meet rival AT&T and other international powerhouses in terms of valuation and network assets, and Ebbers' bid to buy rival Sprint would have cemented a place at the top of this telecom hierarchy.
But regulators' opposition to the Sprint merger derailed that ambitious strategy. Like its other long-distance rivals, WorldCom has seen its share price slide dramatically in the past six months. Ebbers needs to do something to get the company back on track, analysts say, and today's deal is the latest step toward that end.
"This was a very good opportunity," said Current Analysis analyst Jilami Zeribi. "It's what the company really needed to do after the Sprint debacle."
In addition to gaining some competitive local phone assets, WorldCom's proposed acquisition of Intermedia largely was intended to provide the telecom carrier with access to Digex, the Web hosting company controlled by Intermedia.
The Digex pickup is expected to provide WorldCom with an expanded base of data centers, the secure facilities that house application and Web servers for corporations, and newfound expertise in providing Internet services.
The move marks the latest example of a communications carrier attempting to broaden its sources of revenue by embracing data hosting services. Most carriers face falling profits in their traditional voice services businesses.
WorldCom in July warned that its communications services would grow at a slower pace than expected. Similarly, AT&T is trying to reduce its dependence upon consumer long-distance revenue after profits from that business slipped.
In response, those companies have quickly invested in other higher-growth areas, including wireless and Internet services. The AT&T Wireless unit has proved successful for Ma Bell, and the company has its own hosting facilities.
But the scuttled merger between WorldCom and Sprint left Ebbers without a wireless strategy. The Digex takeover may indicate an alternative strategy of investing in data services, an area where WorldCom already is strong via its ownership of UUNet, a major Internet backbone network provider.
WorldCom is not alone in its interest in hosting technologies. The Web hosting arena has become a crowded one in recent years and is a sector that has seen its share of rumors in recent months.
"One of the hottest areas of communications are the e-business hosting providers," said Kevin Mitchell, an industry analyst at Infonetics Research. "They provide the infrastructure and services such as caching. Digex has all that."
Exodus Communications and GlobalCenter, the hosting unit of Global Crossing, are among the largest hosting companies, providing services to companies such as Yahoo, eBay and other major Net sites. The two companies put an end to merger talks this summer.
Digex and MFN Communications-controlled AboveNet also are major hosting companies, although Intel and Qwest Communications International have significant hosting units as well. Dozens of smaller companies, such as Verio and PSINet, also provide hosting services to small businesses.
These hosting providers have helped give rise to an industry of Internet content distribution networks (CDNs) and application service providers (ASPs), two other red-hot services sectors. The hosting centers are home to networking equipment needed to more quickly distribute Web content and provide outsourced applications for businesses.
Next on the horizon
Analysts say that more data and data services are on WorldCom's horizon. They represent the future of telecommunications, and WorldCom has shown its ability to evolve reasonably quickly, analysts note.
But a wireless service continues to top WorldCom's list of necessities. WorldCom has tried to acquire a mobile phone company for years and has consistently failed. Repeated negotiations with Nextel Communications have led nowhere, and Ebbers' bid for Sprint and Sprint PCS proved too ambitious for regulators.
Analysts say the company must look elsewhere. But there aren't many options left other than partnering with a major player, buying Nextel or a range of smaller players, or building something slowly from scratch. None of those are attractive options, analysts say.
"That probably keeps people up at night," Current Analysis' Zeribi said.