MCI Communications has announced third-quarter financial results that industry analysts say place the telco in the catbird seat as it begins official merger discussions with three suitors.
MCI reported revenue of US$4.8 billion, with 100% growth in local services revenue, 27% growth in information technology revenue and double-digit growth across commercial business markets, including data and Internet services.
That good news was tempered by a net loss of $182 million, or $0.26 per share, for the quarter. A loss had been anticipated because of corporate restructuring and a move toward attracting high-end customers and focusing on high-growth areas.
Strong growth in MCI's areas of focus give the company added leverage as it enters formal talks with GTE and WorldCom, both of which have made bids for the Washington, D.C.-based telco. It is also in a new round of talks with British Telecommunications PLC, with which it had formally agreed to merge when the WorldCom offer upset those plans.
Months ago, when BT dropped its original bid price, MCI's financial picture didn't appear to be as strong as it actually is, but "all of this has turned out extremely well for them," said Rebecca Wetzel, an analyst at Telechoice in Upton, Massachusetts.
BT was seen as having a lock on buying MCI, after acquiring 20% of MCI's stock and gaining approval from U.S. federal regulators to take over the remaining 80% of the company. But then BT shareholders exerted pressure and BT dropped its bid. Industry watchers view that as the act that put MCI back into play.
WorldCom swooped in and offered US$30 billion in stock earlier this month, which seemed to knock the BT deal out of the picture and also earned the Jackson, Mississippi-based WorldCom the tag of "upstart." Before the dust cleared, GTE offered $28 billion cash for MCI and said that it was willing to include BT in the discussions.
MCI's third-quarter growth shows why there's such a high level of interest in the company, analysts said.
"MCI's results today make it clear why they're so in demand," said Jeffrey Kagan of Kagan Telecom Associates in Marietta, Georgia. "Their strategy, which has been evolving over the last few years of moving to the high-value customer, has really paid off."
MCI has developed a very attractive and enviable customer base, Kagan said. "They have taken their existing customer base, pared away the lower-volume users, focused on power users and on getting more and more of that power-user's business through additional services and constant return."
Both WorldCom and Stamford, Connecticut-based GTE also announced today that they have entered into standard confidentiality agreements with MCI regarding merger discussions.
As the companies involved move forward in the talks, analysts predicted that BT will play a stronger role in the discussions. Besides BT's share in MCI, the two companies were widely seen as being all but merged when WorldCom came along, and the two have worked companionably for months, analysts said.
WorldCom President and CEO Bernard Ebbers has been less conciliatory toward BT than GTE officials. Both Kagan and Wetzel said that it's likely that even if BT doesn't win the vote of MCI shareholders in the current bidding war, the company will remain part of the deal.
"I wouldn't be surprised if BT and one of the other players forms some three-way agreement that's beneficial to three of the players," Wetzel said. "One will get left out. I think the question is who will get left out."
Kagan finds more synergy in a GTE-MCI pairing, although other analysts have observed that WorldCom and MCI share a similar entrepreneurial spirit.
"MCI was like WorldCom 10 years ago, but they've grown up. They've evolved," he said, questioning whether it's a good plan for MCI to return to the "swashbuckling kind of culture" that pervades at WorldCom.