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Commentary: WorldCom needs a change

Gartner believes that John Sidgmore replacing founder Bernard Ebbers as chief executive of the struggling company makes it more likely that it will be acquired.

By Jay Pultz, David Neil and Eric Paulak, Gartner Analysts

Gartner believes that John Sidgmore replacing founder Bernard Ebbers as the chief executive of struggling WorldCom makes it more likely that the company will be acquired.

The resignation of Ebbers as CEO likely reflects division within WorldCom about the company's future more than pressure from investors or questions about financial improprieties (such as the huge personal loans WorldCom gave Ebbers). As was the case with many network service providers, WorldCom's revenue and profits have dropped, and its stock price has sunk to $2.50 from about $18 at the end of April 2001, and from an all-time high of $64.50 in June 1999. Furthermore, the company won't find immediate salvation in the U.S. market for network service providers, which will likely not recover from its slump until at least the end of 2003.

WorldCom has already made most of the obvious cost cuts, and further substantial reductions in its cost structure would require altering the company fundamentally (such as by selling off its consumer division). Being acquired offers a faster alternative. Ebbers likely preferred to try to keep WorldCom independent--at least until the stock price improved substantially.

Significant change must happen at WorldCom, and quickly. Sidgmore knows Internet Protocol networking and can use Ebbers' departure as an excuse to make deeper cuts, such as selling off WorldCom's Latin American operations. However, Sidgmore has a mixed track record. He built UUNet into a major data network service provider--it was later acquired by MFS Communications and then WorldCom--but the unit has lost revenue and market share since 2001. And WorldCom faces enormous problems with its management services and operations in Europe.

See news story:
WorldCom CEO faces Herculean task
Gartner believes it is likely that in 2002, a healthier network service provider will bid for WorldCom, whose market valuation of about $7.4 billion makes it a great bargain, despite its heavy debt load and an investigation by the U.S. Securities and Exchange Commission. In Gartner's opinion, incumbent local-exchange carriers, especially BellSouth and SBC Communications, would be the most likely suitors.

WorldCom customers should use this opportunity to renegotiate contracts. With the network service provider market contracting, the big three interexchange carriers--AT&T, Sprint and WorldCom--will be in a stronger position to resist further price cuts.

(For a related commentary on the outlook for the U.S. telecom market, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.