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MCI WorldCom-Nextel: Reluctant suitors?

After a five-year tentative courtship, MCI WorldCom and Nextel may be ready to tie the knot. But analysts are still debating whether the potential deal would make financial sense.

On one side of the corporate altar stands MCI WorldCom, whose acquisitive CEO has said he doesn't need a wireless division and doesn't want to buy money-losing companies.

On the other is Nextel Communications, a national wireless phone company that loses money and whose executives say they can succeed independently.

It doesn't sound like a marriage made in heaven. Yet the two companies have been courting the idea of a merger for five years, and now changes in the telecommunications market may be bringing them even closer together.

MCI bid on the wireless company once, long before being acquired by WorldCom, but talks fell through before a deal was reached.

The market is different today, however. The telecommunications industry is in the process of rebuilding itself to offer a complete range of services--voice, data, Internet, and wireless--in one-stop shopping bundles.

Where competitors AT&T and Sprint already have these packages together, MCI WorldCom is missing its wireless piece--a problem, analysts say, that is increasingly glaring.

"The only thing WorldCom knows about wireless is that they both start with the same letter," said Iain Gillot, a wireless industry analyst with International Data Corporation.

Despite news today that the companies are in "preliminary" merger talks, there are good reasons for both companies not do to a deal.

MCI WorldCom CEO Bernard Ebbers has repeatedly said he does not want to make any purchase that will dilute his company's earnings. Nextel, which still posts losses and is saddled with almost $8 billion in debt, would certainly take a bite out of Ebbers' account books.

Nextel also runs a different type of technology than most cellular providers, analysts note. This makes its upgrade path to "third-generation" wireless features, such as high-speed Internet service, more difficult than for ordinary digital wireless companies such as AirTouch.

"In this case, if it walks like a duck and talks like a duck, it may not be a duck," said Cahners In-Stat Group senior analyst Ray Jodoin.

In the meantime, Nextel has successfully added more than 1.5 million subscribers in 1998, and is independently making a strong push into international markets.

But the reasons for a deal are still strong, and getting stronger as competitors move more aggressively into wireless, and traditional long distance traffic begins to migrate slowly toward cellular networks.

As a business-focused provider, MCI WorldCom needs to have a wireless strategy that goes beyond reselling other providers' products, analysts say.

"How can you be focused on business if you can't offer them a full range of services?" Gillott asked. "MCI WorldCom's resale strategy is a complete disaster."

The number of people using wireless phones for long distance service is still small today, but the switchover is "significant," Gillott added. "It's something you want to be worried about if you're someone like MCI."

Nextel is not the only wireless company on the market, although it is the only remaining independent company with a national reach, which analysts say is important to compete with plans like AT&T's successful One Rate. As an alternative, MCI could try investing in smaller companies with valuable territory areas like Omnipoint, some analysts say.

For its part, Nextel has ambitious expansion plans in the United States and overseas, and needs the capital that MCI WorldCom could provide.

"They don't have the distribution, and don't have the brand name of the bigger players," noted Phillip Redman, program manager for The Yankee Group's wireless and mobile phone research division. "MCI WorldCom could provide distribution and branding."

Several senior Nextel executives, including CEO Daniel Akerson, are originally from MCI, which could help ease any corporate transition.

Despite these advantages, analysts warned that talks have a long and established history of falling through long before reaching any agreement.

"If I bet on the horse that was supposed to win the race, but broke its leg, do I want to bet on the same horse again?" Gillott asked. "We've been in this position before."

MCI WorldCom's shares fell 2.8125 to close at 89.6875. Nextel stock slid 0.6875 to 38.9375.