At WorldCom, Crying an M&A River

The government took my sandbox, CEO Ebbers whines as investors see his company's weakness.
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If all else fails, carp about the government.

WorldCom

(WCOM)

CEO Bernie Ebbers Thursday returned to that time-tested strategy, though to little effect. The latest round of grousing served mostly to highlight the fact that WorldCom, once a highflying, voracious acquirer and later a prize property for larger bidders, has now sunk to the depths of being largely ignored by the big telcos that will dominate the next round of industry-wide consolidation.

"Despite being the Street's top merger candidate,

WorldCom is probably last in line among the long-distance companies," says Scott Cleland, a telecommunications analyst with the Precursor Group, an independent Washington-based research shop.

With the entire telecom business suffering through a steep spending pullback and paralyzing price wars, any service provider deemed likely to miss out on the next wave of big mergers could see its shares fall even further. WorldCom shares, already more than 50% off their 52-week high, dropped 13 cents Thursday to $12.32.

Woe Is Me

WorldCom posted earnings of 16 cents per share Thursday, in line with lowered analyst expectations and down 21% from a year ago. Underlining that trend, WorldCom had a 6% decrease in its core long-distance sales to businesses.

TheStreet.com

has explored WorldCom's

continued vulnerability to heavy price competition.

Ebbers complained on a subsequent conference call that regulators are hindering telecom's progress by turning approval processes into a long, costly ordeal. WorldCom's attempt to buy

Sprint

, which fell apart in the summer of 2000, comes to mind. Ebbers has long denied his company is for sale.

That Ebbers is grousing about the government again is no surprise, of course. But throwing cold water on the prospect of consolidation among the phone service providers serves only to reinforce the notion that WorldCom isn't comfortable with its lowly status in the takeover world.

Many industry observers see the field of 11 big struggling phone companies shrinking to less than half that size in the next couple of years. And while conventional Wall Street wisdom used to put WorldCom near the top of the list of attractive targets, there's a growing notion that the appeal of the nation's No. 2 long distance company may be slipping.

Thucydides

Baby Bells

Verizon

,

SBC

and

BellSouth

, which are the only outfits with the financial strength to buy weaker rivals in this market, would be more inclined to look at

Qwest

,

Sprint

or

AT&T

before WorldCom, says Cleland.

"Those companies have more comparable customer bases and compatible network engineering," the analyst says. "WorldCom is a hostile alien: They are antiunion, their networks couldn't be more different and they have a lot of debt. Bells don't need that headache."

Given the bleak outlook for the sector and the looming uncertainties about the nation's economy and security, WorldCom and other would-be merger targets will likely have to go it alone for the next nine months or more, say investors and analysts.

"This is not the time to make the big strategic deals," says Michael Kaufman of K Capital Partners, a Boston-based hedge fund. "The world is on hold right now, and will be for the next couple months in a lot of different sectors."

To be sure, WorldCom has been managing its costs and remains one of the few telcos to hit its financial targets this year. But there is no sign that business will improve: The company said Thursday that sales will continue to slow next quarter and in 2002.

That leaves Ebbers to try to focus investors' attention elsewhere. "Big mergers are not going to happen anytime soon," says Kaufman, who holds no positions in WorldCom. "So he might as well jawbone about regulatory delays."