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Mci Worldcom, Inc. Business Information, Profile, and History

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515 East Amite Street
Jackson, Mississippi 39201-2702

Company Perspectives:

MCI WorldCom is a new kind of communications company. With revenue of more than $30 billion, MCI WorldCom combines financial strength and a depth of resources to pursue the industry's best growth opportunities with an advanced global network built for the data-intensive era of communications.

History of Mci World Com, Inc.

MCI WorldCom, Inc. is one of the largest telecommunications companies in the world. Formed on September 15, 1998, from the $37 billion merger of MCI Communications Corporation and WorldCom, Inc., the company's operations are organized around three divisions: MCI WorldCom, U.S. telecommunications; UUNET WorldCom, Internet and technology services; and WorldCom International. The MCI WorldCom division is the second largest long distance company in the United States (after AT&T), with a 45,000-mile nationwide fiber optic network, that provides local phone service in more than 100 markets and offers data, Internet, and other communications services. UUNET WorldCom maintains a highly reliable backbone network that provides local access to the Internet from more than 1,000 locations in the United States, Canada, Europe, and the Asia-Pacific region, in addition to a wide range of other Internet services. WorldCom International is a local, facilities-based competitor in 15 countries outside the United States, connecting to the company's overall global network more than 5,000 buildings in Australia, Belgium, Brazil, France, Ireland, Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, Singapore, Switzerland, Sweden, and the United Kingdom.

Before the 1998 merger MCI Communications, founded in 1968, was well known as the company that led the charge in introducing competition in the telecommunications industry and precipitated the breakup of AT&T's Bell System. Following the breakup, MCI quickly became a multibillion-dollar global enterprise. WorldCom began as a reseller of long distance services in 1983 before emerging as the fourth largest long distance provider and a full-service telecommunications powerhouse in the mid-1990s. WorldCom's growth was aided by a series of major acquisitions, including Resurgens Communications Group, Inc. and Metromedia Communications Corporation (1993); IDB Communications Group, Inc. (1994); WilTel Network Services (1995); MFS Communications Company, Inc. and UUNET Technologies, Inc. (1996); and Brooks Fiber Properties, Inc., CompuServe Corporation's data network, and America Online Inc.'s network services subsidiary (all in 1998).

MCI's History Began with 1963 FCC Application

Founded in 1968 as Microwave Communications, Inc. (MCI) by John Goeken, owner of a mobile radio business, MCI's regulatory history began in 1963, when Goeken filed an application with the Federal Communications Commission (FCC) for permission to construct a private line microwave radio system between Chicago and St. Louis, Missouri. Goeken proposed to erect a series of microwave towers between the two cities that would carry calls on a microwave beam. AT&T actually had developed the technology and used microwaves on many of its long distance routes. Unlike the Bell System, which had to expend enormous sums to maintain and operate the basic wire-and-cable network, however, Goeken proposed to offer a much cheaper alternative by employing microwave technology exclusively. As Fortune, April 1970, noted, Goeken contended that he would provide a service not offered by any of the existing telephone companies: "... wider choice of bandwidths, greater speed, greater flexibility ... and prices as much as 94 percent cheaper than A.T.&T.'s." In addition to carrying voice transmissions, the company stated that its greatest appeal would be to those who wanted to send data or a combination of data and voice messages.

Goeken's application set the stage for one of the great corporate battles in U.S. history by challenging the prevailing public service principle that had been developed and applied to telephony during the 19th and 20th centuries. The public service principle derived from the philosophy that universal availability of telephone service could be achieved only through one independent and interconnecting network. It was believed by those who built the system and those who came to regulate it that the communications industry was a natural monopoly, in which quality and service were best achieved through one integrated system rather than through the play of competing interests. At the time when Goeken filed his application, AT&T saw him as a small but important threat to its position as the nation's basic provider of phone services.

In 1964 several corporations, including AT&T, its Illinois Bell subsidiary, Western Union, and GTE's Illinois-based subsidiary, petitioned the FCC to deny Goeken's application. The corporations argued that Goeken's proposed service would be redundant. More important, AT&T charged that Goeken's service would skim the most profitable segment of the communications market at the expense of universal service provided by Bell. AT&T depended on charging high rates for some of its intercity services--such as private line, WATS, and regular long distance&mdashø subsidize the vast expense of constructing and maintaining the nation's communications network. AT&T also used the revenue derived from these services to subsidize the price of local service, making the cost of basic phone service affordable to the average customer. If Goeken and others were allowed to compete openly in the market, this delicate system of rate averaging would be disrupted. Although it was in the interest of AT&T and the others to stall proceedings as long as possible in the hope that Goeken would not pursue his plan, most of the delays stemmed from Goeken himself. Filing deficiencies caused endless delays.

The seeds of change in the regulatory climate were sown in the revolution of new technologies that arose during and after World War II. Rapid technological advances in the fields of microwave relay, satellites, computers, and coaxial cable, in addition to other technologies such as mobile radio, recording devices, and answering machines, gave rise to a number of small, aggressive firms seeking to enter the telecommunications field. As these firms, armed with the new technologies, demanded increasingly more access to the telecommunications market, the FCC was compelled to respond. In a string of rulings, the FCC first in 1956 decided that under certain conditions non-Bell terminal equipment could be attached to the Bell System network. In 1959 the FCC permitted firms to operate private microwave communications systems for internal use.

With these two decisions, the FCC paved the way for entry of competitive firms into certain markets. The FCC completely opened the terminal equipment market in 1968. Almost immediately dozens of small firms entered the market seeking to sell equipment in competition with Bell products.

In this changing regulatory climate of the early 1960s, Goeken arrived on the scene proposing a supplemental service that he claimed was not being provided by any company. Goeken claimed that he was seeking only a peripheral submarket much too small to disrupt AT&T's system of rate averaging. AT&T, however, opposed the entry, claiming that the ostensibly new and innovative service was merely a variation of a service already offered.

McGowan Arrived at MCI in 1968

In 1968, as the FCC was considering the newly incorporated MCI's application, the fortunes of the small company took a dramatic turn when William McGowan joined the company as chairman and chief executive officer. McGowan saw promise in the company, put his money behind it, and soon devised a strategy that would lead MCI to phenomenal success. When McGowan joined the firm, MCI's major asset was a five-year-old application to provide point-to-point private-line service by microwave between Chicago and St. Louis.

Almost immediately, McGowan set up a new company, Microwave Communications of America, to attract private investors to finance MCI-affiliated companies around the country. At the same time the company announced plans for an 11,000-mile system that would run through 40 states and be operated by 16 affiliates. Most important, McGowan began to orchestrate a legal-political strategy that would serve MCI extraordinarily well in later years when the company lobbied the FCC and Congress to grant its license.

On August 13, 1969, in a four-to-three decision, the FCC authorized MCI's Chicago-St. Louis application. The decision also assured MCI that it could interconnect with the Bell System network to enable MCI to provide its proposed services. Instead of settling the AT&T-MCI dispute, however, the FCC's MCI decision set the stage for a major battle over telecommunications policy as a result of the commission's failure to delineate clearly the boundaries of competition. The market threatened by MCI's entry was considerably larger than the market opened by the FCC's 1959 decision, which had allowed individual firms to set up their own in-house microwave communications systems. AT&T repeatedly charged that MCI would not be providing any new technologies or services but only would be skimming the most profitable routes, which AT&T needed to support unprofitable rural routes and basic local phone service.

It was clear to McGowan that to build MCI into a major national telecommunications network, AT&T's monopoly would have to be dismantled. McGowan launched a three-pronged offensive, lobbying Congress, the FCC, and the courts. The company hired Kenneth Cox in 1971 as a senior vice-president who was assigned to lobby the FCC. Cox was a former FCC commissioner who had voted for approval of MCI's application in 1969.

AT&T responded aggressively to the FCC's MCI decision and was joined by Western Union and GTE in petitioning the FCC to reconsider MCI's application. Since other firms were then seeking entry to provide similar microwave private-line services, the companies argued that MCI could no longer be considered an isolated experiment and that increased competition would lead to higher prices, interfere with universal service, and undermine the basic system of rate averaging. MCI countered that these concerns were unfounded. The FCC denied the petitions, and in 1971 MCI received final approval to build its Chicago-St. Louis route.

Ultimately the 1971 FCC decision led to open entry into the private-line market. The FCC's 1971 deregulatory move, however, was narrow in scope and intent, designed to open only a specialized segment of the market. It was not the initial intention of the FCC to encourage full-scale competition with AT&T. The goal was to allow other firms to provide services not available from AT&T.

Verged on Collapse in Early 1970s

On June 22, 1972, MCI issued public stock, raising more than $100 million, and, assisted by a $72 million line of bank credit, it began construction of the Chicago-St. Louis route. The company also laid plans for its national microwave network that would run from coast to coast. MCI soon ran into trouble with AT&T, however, over the issue of interconnection with Bell's basic phone network. The FCC ruling had assured MCI that it could use Bell's local phone network to provide its service, but it did not stipulate at what cost or how quickly AT&T should install MCI's lines. At the same time AT&T announced that it was instituting a new pricing system called HI/LOW to compete directly with MCI and others on private line routes. By 1973 MCI was in financial trouble. Just months away from opening its nationwide microwave network, the company defaulted on its line of bank credit and was on the verge of collapse. Also in 1973 Microwave Communications, Inc. reorganized as MCI Communications Corporation.

Because the FCC's rulings--especially the decision on MCI--had spawned such competition, the commission had a political stake in MCI's success. McGowan understood the FCC's commitment to the survival of competition. To ensure MCI's preservation he worked quickly to enter the more profitable markets, capitalizing on the FCC's support. In the fall of 1973, McGowan, badly in need of cash, urged the FCC to authorize MCI to enlarge its services to include FX lines. Such lines connect a single customer in one city to another city, in which any number can be reached. The service, however, required the use of Bell's switched network, which AT&T saw as a violation of the intent of previous FCC rulings. In the protracted legal battle that ensued, MCI won a major victory that served as a prelude to the company becoming a full-scale long distance competitor of AT&T.

In 1973 MCI also began lobbying the antitrust division of the Justice Department to file a suit against AT&T to break apart the Bell System. On March 6, 1974, MCI filed a civil antitrust suit of its own, seeking damages from AT&T. Shortly thereafter, the Justice Department filed an antitrust case against AT&T to break up the Bell System.

Execunet Saved MCI, Led to Long Distance Competition in the Late 1970s

Even though MCI had succeeded in enlarging its markets by winning approval to provide FX services, the company had yet to make a profit. Between March 1973 and March 1975, the company lost working capital at the rate of $1 million a month. It needed new markets and, in a risky gamble, began to offer Execunet, a service nearly identical to AT&T's regular, very profitable long distance service. If the company was successful it could become a wealthy corporation, but if it failed, MCI faced the possibility of bankruptcy.

In 1975 V. Orville Wright joined MCI. Wright soon became president. Also in 1975, AT&T protested to the FCC that by providing Execunet, MCI had flagrantly exceeded its mandate. The FCC concurred, and MCI was directed to cease providing Execunet service. MCI won an appeal, and in 1978 the Supreme Court refused to review the appeal court's ruling that overturned the FCC ban on Execunet and ordered Bell to offer interconnection service to MCI. The breakthrough Execunet victory saved MCI from possible financial collapse. The company, in opposition to both AT&T and the FCC, had won the right to provide long distance service. In effect, MCI had cracked the Bell System monopoly. MCI soon began offering its long distance service to residential as well as business customers; in March 1980 MCI became the first AT&T competitor in the residential market when it launched residential service in Denver. As a full-scale competitor in the lucrative long distance market, MCI saw its revenues increase sharply. By 1981 MCI's annual revenues approached $1 billion. The Execunet victory also opened the long distance market to other small firms. Few, however, could afford to expend the enormous sums needed to build and maintain their own network facilities.

1984 Bell System Breakup Led to Difficulties

By the early 1980s it was clear that the government was winning its antitrust suit against AT&T. On January 8, 1982, the Justice Department and AT&T announced agreement in the seven-year-old case, providing for the divestiture of the 22 wholly owned local Bell operating companies. MCI's successful crusade for deregulation and divestiture, however, placed the company under financial strain in the immediate aftermath of the Bell System's breakup in 1984. AT&T, responding to the competitive inroads made by MCI and others, began reducing its rates drastically. MCI's profit margins collapsed as it was compelled to reduce rates. Higher access charges also squeezed the company. In 1985 MCI's stock plunged from more than $20 per share to under $7 per share, and in 1986 the company, despite having the second largest share of the long distance market, posted a loss of $448.4 million. From the beginning, MCI's profits derived not from superior technology or innovative processes, but from its cost advantage over AT&T, which it passed on to customers. Once the local Bell operating companies were divested, MCI's artificial cost advantage disappeared.

In 1985 MCI was awarded a disappointing $113.3 million in its civil antitrust suit against AT&T. Also in 1985, in need of capital to expand MCI's national network and to finance an aggressive marketing campaign to win new long distance customers, McGowan struck a deal with IBM, which bought 18 percent of MCI for cash with the option to expand its holdings later up to 30 percent.

McGowan continued to argue the need to regulate AT&T for several years before open competition could be considered viable. Whereas McGowan had led the charge for deregulation throughout the 1970s, he now argued that only vigorous regulation could guarantee that MCI and other competitors would be able to compete effectively with AT&T. The following year, MCI called for the removal of all remaining regulatory restraints. The odd alliance was created by the companies' shared perception that deregulation would enable both to improve their financial outlook by increasing rates. The two companies also had a shared interest in opposing proposals advanced by the FCC and the Justice Department to relax regulation of the former Bell operating companies, which had become competitors of MCI and AT&T.

MCI was involved early on in what would later be dubbed the Internet. In September 1983 the company launched MCI Mail, a new nationwide e-mail system. Five years later the National Science Foundation Network (NSFNet) was launched; constructed by MCI, this ultra-high-speed digital network linked a number of academic computer centers and became the "backbone" of the Internet. Meantime, in 1985 V. Orville Wright retired as president of MCI, but continued to serve as vice-chairman until 1990. He was replaced as president by Bert C. Roberts Jr.

By the early 1990s MCI had weathered the wake of AT&T's divestiture and had expanded rapidly into providing a wide range of domestic and international voice and data communications services. The company's communications services included domestic and international long distance telephone service, international record communications services between the United States and more than 200 countries, and a domestic and international time-sensitive electronic mail service. Long distance telephone service accounted for 90 percent of MCI's total revenues in 1989. The company had bolstered its position in domestic and international markets through a series of investments, including acquisition of Satellite Business Systems, RCA Global Communications, Inc., and certain assets and contracts of Western Union's Advanced Transmission Systems division. In 1990 MCI also purchased a 25 percent interest in INFONET Services Corporation, a provider of international data services, and acquired for $1.25 billion Telecom*USA, then the nation's fourth largest long distance company. With the acquisitions, MCI had approximately a 16 percent share of the domestic long distance market.

MCI's Friends & Family Program Launched in 1991

In March 1991 the company announced that it had acquired Overseas Telecommunications, Inc., provider of international digital satellite services to 27 countries worldwide. That same month, one of the key events in later company history occurred--the launching of the Friends & Family marketing program, which offered 20 percent discounts to groups of MCI customers with members who phone each other. AT&T had been finding success winning back MCI customers through follow-up calls and an aggressive advertising blitz. Consequently, in the second half of 1990 MCI market share dropped to 13 percent. Friends & Family helped MCI attract seven million new customers, pushing its market share to 20 percent by the end of 1993.

In December 1991, the same month that MCI completed the conversion of its entire nationwide network from analog to digital transmission, president and COO Roberts was named to the additional post of CEO, with McGowan remaining chairman. McGowan, a heart transplant recipient in 1987, died of a heart attack the following June, at the age of 64. Roberts was named to succeed him as chairman, retaining the CEO post as well.

MCI Diversified Under Roberts in the Mid-1990s

While the company focused almost exclusively on the long distance market when McGowan was in charge, MCI under Roberts's leadership began diversifying in anticipation of both the further deregulation of the U.S. telecommunications market and the predicted convergence of telecommunications, computers, and entertainment. In September 1992 MCI entered into an alliance with Canadian long distance firm Stentor to create the first fully integrated digital network linking the United States and Canada. MCI introduced 1-800-COLLECT in May 1993, the first collect calling service of its kind.

In June 1993 MCI and British Telecommunications plc (BT) announced that they would form a worldwide alliance to provide advanced global network services. Following regulatory approval in mid-1994, BT purchased a 20 percent stake in MCI for $4.3 billion. MCI and BT set up a joint venture called Concert Communications Company, which was 75 percent owned by BT and 25 percent owned by MCI. Concert offered worldwide voice and data services to multinational corporations.

In January 1994 MCI formed MCImetro, entered the long distance market in Mexico, and unveiled networkMCI. Through MCImetro MCI planned to build a $2 billion fiber optic phone network, bypassing local phone companies and offering alternative local service. By 1995 the company had received regulatory approval as a competitive local carrier in 15 states. The Telecommunications Act of 1996 (signed into law in February 1996) opened up competition even more, allowing local phone and long distance companies to compete in each other's markets and providing additional opportunities for MCImetro. In Mexico, MCI formed an alliance with banking group Grupo Financiero Banamex-Accival (Banacci) to form Avantel, a joint venture to provide competitive long distance service in Mexico. In September 1995 Avantel began construction of Mexico's first all-digital fiber optic network. After completion of the 3,400-mile network, Avantel in August 1996 became the first company to provide alternative long distance service in Mexico. By July 1997 the new venture had captured about ten percent of the $4 billion long distance market in that country. NetworkMCI, meantime, was a software package aimed at small and medium-sized businesses that bundled e-mail, fax, paging, document sharing, Internet access, and videoconferencing.

MCI invested $1 billion for a ten percent stake in The News Corporation Limited in August 1995. The two companies subsequently announced that they would develop a direct broadcast satellite (DBS) system in the United States, purchasing one of only three DBS licenses in 1996. News Corporation and MCI then set up American Sky Broadcasting (ASkyB), a joint venture aiming to provide digital satellite services to homes and businesses by late 1997.

In September 1995 MCI entered the cellular phone market by paying about $210 million for Nationwide Cellular Service, Inc., the largest independent reseller of cellular services. Over the next few months MCI expanded Nationwide through additional contracts to resell service, so that the company was able to offer service to 75 percent of the U.S. population by early 1996. MCI thereby had quickly gained a significant presence in this fast-growing telecom sector without having to invest billions of dollars developing a wireless infrastructure. In November 1995 MCI paid $1.13 billion to acquire Canadian firm SHL Systemhouse Inc., a leading systems integration and outsourcing company, providing information technology services to commercial and governmental enterprises. The following April MCI introduced MCI One, a service providing consumers and small business owners a single source for a full range of communications needs, including long distance, cellular, paging, Internet access and e-mail, calling card, and a personal "One Number" with intelligent routing.

During 1996 Gerald H. Taylor was named CEO, with Roberts retaining the chairmanship. That November MCI and BT entered into a $24 million merger agreement to create a global communications power called Concert plc. As the merger moved through the process of clearing regulatory hurdles on both sides of the Atlantic, MCI announced in July 1997 that its start-up local telephone operation would lose nearly $800 million in 1997, about twice what BT had expected. BT, concluding that MCI was worth less than it originally thought, forced MCI to renegotiate the merger agreement. The companies announced in August that BT would pay $19 million to acquire the 80 percent of MCI it did not already own, a 22 percent reduction from the previous deal. This opened the door, however, to other, unsolicited bidders. WorldCom came forward on October 1 with a $30 billion stock swap bid for MCI, a company more than three times its size. Two weeks later, GTE Corporation stepped into the fray with an all-cash offer of $28 billion. On November 10 MCI accepted a sweetened takeover offer from WorldCom, amounting to a $37 billion stock swap.

WorldCom Began as LDDS in 1983

WorldCom's history began with that of Long Distance Discount Services, Inc. (LDDS), which was formed in 1983 in Hattiesburg, Mississippi, when the breakup of AT&T enabled thousands of competitors to start reselling long distance telephone service to individual and business customers. Bill Fields convinced several investors to lease a local Bell System Wide-Area Telecommunications Service (WATS) line and resell time on the line to businesses. Long distance resellers like LDDS bought time from regional Bell companies in volume and sold it, often at a discount, to business customers. LDDS owned the switches, or nodes, of its network and leased the lines from local providers. The sophisticated long distance technology was designed to handle a high volume of calls. Some observers compared the long distance telephone industry with the airline industry: there was a fixed cost for getting calls or seats from one place to another, and the more customers a telecommunications company or airline had, the lower its costs would be. Price competition among these companies was ruthless. Assuming that the "Baby Bells" would continue to lease the lines at a fixed rate, Fields signed up 200 customers. But when Bell started raising the charges for the use of the lines, LDDS began to lose money.

By the early months of 1985 the fledgling business was losing $25,000 each month. It became clear to Fields that he was failing at the day-to-day management of LDDS, and he first tried to sell the company. Later in 1985 several owners signed LDDS over to Bernard Ebbers, one of the initial investors. By the time Ebbers became president and chief executive officer, LDDS was $1.5 million in debt.

Ebbers was a Canadian who came to the United States on a basketball scholarship to Mississippi College. After graduation he became a high school baseball coach. He later worked in the garment trade as a distributor, but lost interest in the low-margin industry. Ebbers seized the chance to buy a 40-room motel in Columbia, Mississippi, in the 1970s, borrowing the necessary money to establish himself in the business. In the real estate market of the late 1970s, the value of prime properties could double over the course of five years. Ebbers parlayed his one hotel into 12 by the early 1980s, garnering healthy operating and asset gains.

As head of LDDS, Ebbers worked to control costs. He kept overhead low with lean operations and unpretentious offices. The streamlined LDDS brought on new clients with a claim of customer service that larger long distance companies could not offer. LDDS did not use telemarketing to solicit new business, but mobilized a direct sales force to make personal contacts. After the initial face-to-face solicitation, LDDS made monthly, and sometimes weekly, office calls to ensure that the customers' service was satisfactory. The company provided an alternative to the major long distance carriers' across-the-board packages by tailoring service to each customer's calling patterns, which simultaneously maximized routing efficiency and cut costs. The major long distance carriers at this time also were exerting a great deal of effort to secure big-ticket clients; LDDS was able to take advantage of this by concentrating on small business customers who were falling through the cracks.

LDDS Grew Rapidly Through Acquisition in the Late 1980s and Early 1990s

Within six months of Ebbers's move into the driver's seat, the company had moved into the black. In 1986 revenue rose to $8.6 million, and a year later sales had grown to $18 million. By 1988 annual revenues had skyrocketed to $95 million. Consolidation and acquisitions were the principal factors that enabled LDDS to accomplish this rapid growth during the last five years of the 1980s. The company leveraged its order to buy other third-tier long distance companies, including: Telesphere Network, Inc. (1987); Com-Link 21, Inc. of Tennessee (1988); Telephone Management Corporation (1988); Inter-Comm Telephone, Inc. (1989); ClayDesta Communications of Texas (1989); Microtel, Inc. (1989); and Galesi Telecommunications of Florida (1989). The acquisitions cost the company a total of about $35 million, but expanded LDDS's geographic network to include Missouri, Tennessee, Arkansas, Indiana, Kansas, Kentucky, Texas, Alabama, and Florida.

Each company over which LDDS assumed control performed better after acquisition. Part of the success was attributed to the LDDS standards of customer service, but the economies of scale gained when more companies came on line also brought higher profitability. LDDS applied its customer service ideals to new acquisitions through a decentralized system wherein each state office set its own sales goals. Companies in the system formulated their own marketing strategies in response to local market conditions.

LDDS's annual earnings grew from $641,000 in 1986 to more than $4.5 million in 1989. That same year the company merged with 17-year-old, Nashville-based, Advantage Company, a public company that was losing money when the two consolidated. The merger benefited both companies--it enabled LDDS to reduce its debt and finance future purchases through stock offers, and it brought Advantage into profitability. LDDS was now a public company, incorporated under the name LDDS Communications, Inc. By the end of 1989, LDDS's revenue-per-employee stood at $360,000, more than double the industry average, and triple that of some of LDDS's higher-priced competitors. LDDS also pursued other avenues to spur growth. Its 14 percent annual internal growth rate was fueled by thorough infiltration of its growing markets.

Despite the economic downturn of the early 1990s, LDDS continued its upward climb. The long distance telephone business was not adversely affected by the economic climate, as the telephone had long since established itself as an indispensable part of the business world. In fact, LDDS made two acquisitions that year, purchasing Mercury, Inc. for $10.3 million and Tele-Marketing Corporation of Louisiana for $15.5 million. Despite the recession, LDDS's 1990 profit was $9.8 million, ten times its 1986 total. Sales had grown sixteenfold in that same time span.

LDDS made three acquisitions in 1991, using cash, stock, and bank debt to finance purchases that totaled $90 million. National Telecommunications of Austin was purchased with a combination of $27 million in cash and stock. The acquisition of Phone America of Carolina established an LDDS presence in North and South Carolina and eastern Tennessee. These two companies had combined annual revenues of $51 million. LDDS also made its largest acquisition up to that time with the purchase of Mid-American Communications Corporation. Mid-American provided long distance service to Nebraska, Missouri, Kansas, Illinois, Wisconsin, North Dakota, Minnesota, Colorado, New Mexico, and Arizona. The acquisitions enabled LDDS to increase its sales by 71 percent over 1990 to $263.41 million.

Between 1983 and 1991, LDDS spent more than $200 million to purchase about 24 smaller companies. The additions brought the LDDS network to 27 states, a system that excluded only the Northeast and Northwest. The downside of all of this growth was that it left the company with $165 million in long-term debt, as well as a negative net worth.

At about the same time, AT&T started trying aggressively to win back customers of all sizes. Despite its dramatic success, LDDS and other third-tier long distance companies had captured about one percent only of the total long distance market at this point. In the 1990s the big three telecommunications companies aimed for the small- and medium-sized businesses they had previously neglected.

LDDS Became Fourth Largest Long Distance Company in 1992

LDDS did not stand idly by, however. In 1992 LDDS acquired Shared Use Network Systems, Inc.; Automated Communications, Inc.; Prime Telecommunications Corporation; TFN Group Communications, Inc.; and Telemarketing Investments, Ltd. These companies, combined, expanded LDDS service in Arizona, Florida, Iowa, Nebraska, Nevada, New Mexico, New York, Ohio, Utah, Virginia, and West Virginia. The new affiliates filled in LDDS's service network and brought a total of $66 million in annual revenues.

But a much more important development for the company in 1992 was its merger with Advanced Telecommunications Corporation (ATC). The Atlanta-based company had $350 million in annual sales spread over a network of 26 southern states. The merger increased LDDS's annual revenues by 30 percent to $801 million in 1992. Although merger-related expenses caused LDDS to take a loss of $8 million for the year, the company expected to realize significant cost savings, increased opportunities for acquisitions, and a wider variety of products with the consolidation. Cost savings were achieved through LDDS's ever-enlarging networks, which produced a situation in which a larger percentage of the company's calls originated and terminated within its service area. Therefore, more calls stayed on the network of low-cost transmission facilities that were owned or leased by LDDS. Of course, increased volume lowered the per-minute costs. LDDS's acquisition of ATC also made the consolidated company the fourth largest long distance provider in the United States (behind AT&T, MCI, and Sprint).

In March 1993 LDDS acquired Dial-Net Inc., which had operations spread throughout half of the United States. Two months later, the company moved into a new headquarters in Jackson, Mississippi. LDDS had dodged rumors and predictions of imminent takeover almost since its inception; in an effort to put to rest such speculation, in September 1993 the company merged with Metromedia Communications Corporation (MCC) of East Rutherford, New Jersey, and Resurgens Communications Group, Inc. of Atlanta. Through the three-way transaction, valued at $1.2 billion, LDDS shareholders collected about 68.5 percent of the fully diluted equity of the combined company, while MCC and Resurgens shareholders secured the remainder. LDDS issued 19 million new common shares in conjunction with the merger and made a private placement of $50 million in convertible preferred stock. The merger extended LDDS's network to include all 48 mainland states, with MCC's strength in the northeast and Resurgens's strength in California of particular importance. The new entity was renamed LDDS Communications, Inc.; John Kluge, who had been chairman of MCC, became chairman of LDDS Communications, and Ebbers was named CEO.

Diversified LDDS Emerged as WorldCom in 1995

LDDS Communications dramatically broadened its telecommunications offerings in the mid-1990s through a series of significant acquisitions. In December 1994 the company acquired Culver City, California-based IDB Communications Group, Inc. in a $900 million stock deal that greatly expanded its international capabilities. Gained through the purchase were gateways to 65 countries, voice and data networks, undersea cables, and international earth stations and satellites. The next month LDDS completed the acquisition of WilTel Network Services for $2.5 billion in cash from The Williams Companies, a pipeline company. Williams had created an 11,000-mile fiber optic cable network, much of it snaked through unused oil and gas pipelines. It was one of only four national networks in the United States. LDDS had quickly moved from being a leaser of a larger rival's phone lines to having one of the most sophisticated U.S. networks, as well as international gateways and networks. With its eye on becoming a global leader in telecommunications, the company changed its name to WorldCom, Inc. in May 1995. Basketball superstar Michael Jordan started a stint as a corporate spokesperson for the company in December of that year. For the year, WorldCom recorded revenues of $3.70 billion, a 65 percent increase over the prior year.

Having added international capabilities and a nationwide network to its core long distance business, WorldCom next aimed for a piece of the local communication service market. It was helped in this effort by the February 1996 signing into law of the Telecommunications Act of 1996, which permitted local and long distance companies to enter each other's markets. Following the passage of this landmark legislation, WorldCom signed agreements to become the primary provider of long distance service for GTE, Ameritech, and SBC Mobile Systems. The company received permission from state regulators in Connecticut, Florida, Illinois, California, and Texas to provide local telephone service. In December 1996 WorldCom acquired MFS Communications Company, Inc. for $14.4 billion in stock. MFS was a leading provider of alternative local network access facilities--bypassing the Bell networks--through digital fiber optic cable networks it had built in and around more than 50 U.S. cities as well as several in Europe. The addition of MFS made WorldCom the first company to offer both local and long distance services over its own network in the United States since the AT&T breakup. MFS also owned a trans-Atlantic fiber optic link and had just acquired--in August 1996--UUNET Technologies, Inc., the world's largest Internet service provider (and also the first). MFS Chairman James Q. Crowe was named chairman of WorldCom following the merger, UUNET CEO John W. Sidgmore was named vice-chairman, and Ebbers remained president and CEO. WorldCom revenues reached $4.49 billion in 1996, although the company recorded a net loss of $2.21 billion, reflecting a $2.14 billion charge related to the acquisition of MFS.

WorldCom could now offer an impressive array of individual services--local, long distance, Internet, and international&mdash well as "bundled" services that were particularly attractive to businesses. One area in which it was clearly lacking was cellular, although in 1996 it had purchased Phoenix, Arizona-based Choice Cellular, one of the leading cellular resellers in the United States. But WorldCom was not done dealing. From September through November 1997 the company announced acquisitions of CompuServe Corporation, Brooks Fiber Properties, Inc., and MCI. CompuServe was acquired from H&R Block Inc. in January 1998 for $1.2 billion in stock. WorldCom retained CompuServe's data network but swapped its consumer online service division for America Online's ANS network services subsidiary. These network additions significantly bolstered UUNET's capacity. January 1998 also saw WorldCom complete its $2.9 billion purchase of Brooks Fiber, like MFS a provider of alternative local access networks in the United States. Brooks Fiber added an additional 34 cities to the 52 markets where WorldCom already offered alternative local phone services.

MCI WorldCom Created in 1998

For 1997 WorldCom posted revenues of $7.35 billion, a 64 percent increase over 1996. The combination of WorldCom and MCI, however, was expected to add up to a company with revenues exceeding $30 billion. The $37 billion merger (including $7 billion in cash paid by WorldCom to acquire BT's 20 percent stake in MCI), which was consummated on September 15, 1998, was at the time of its announcement in November 1997 the largest merger ever, although it soon was eclipsed by other deals in the merger frenzy of the late 1990s. The resultant MCI WorldCom, Inc. boasted of 22 million customers, 25 percent of the long distance market in the United States, some 933,000 miles of fiber for long distance service, local network facilities in 100 U.S. markets, 508,000 fiber miles for local service, and an international presence in more than 200 countries. European regulators, fearful that MCI WorldCom would have too much control of the Internet backbone, forced MCI to divest all of its Internet assets, and MCI agreed in July 1998 to sell them to Cable & Wireless PLC for about $1.6 billion in cash. MCI WorldCom, however, was able to keep WorldCom's prized UUNET Internet operation. As with other WorldCom takeovers, Ebbers took the posts of president and CEO of the new entity, and MCI's Roberts was named chairman.

In March 1998, meanwhile, Telefonica de España S.A. joined with WorldCom and MCI in business ventures that aimed at expanding MCI WorldCom's reach in Europe and Latin America. WorldCom in August 1998 sold $6.1 billion in bonds, the largest corporate bond deal in history, raising funds to help pay for its purchase of MCI. In December 1998 EchoStar Communications Corp. agreed to buy the satellite television business of News Corporation and MCI WorldCom (including ASkyB) in a stock transaction valued at more than $1 billion, with MCI WorldCom slated to be left with a stake of about seven percent in EchoStar. In August 1998 BT agreed to buy MCI's 24.9 percent stake in the Concert joint venture for $1 billion, effectively bringing to a close the two companies' partnership. It was not the end of Concert, however, as BT had in the meantime formed a new global joint venture with AT&T to provide multinational clients a host of telecommunications and data services; Concert was melded into this joint venture. In late September 1998 the newly charged competitive environment was clearly evident when MCI WorldCom launched its own bundled service for multinationals, called On-Net. Certainly the telecommunications wars--which MCI had helped precipitate--were only just beginning, and MCI WorldCom was certain to be on the front line of nearly every battle.

Principal Divisions: MCI WorldCom; UUNET WorldCom; WorldCom International.

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almost 6 years ago


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