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MCI's Stock Plunges Amid Doubts on Merger with BT

By Mike Mills
The Washington Post

British Telecom's $23.5 billion purchase of MCI was in doubt Thursday, with British Telecom contemplating either renegotiating or scrapping the deal to create a global telecommunications giant.

And as MCI Communications Corp.'s stock took a drubbing on the news, the Federal Communications Commission stepped in and approved the merger several days sooner than expected - an unusual example of a government agency rushing to the aid of a U.S. company.

District of Columbia-based MCI announced late Wednesday that the companies were reviewing "the economic terms of their existing merger agreement" in light of a surprise announcement by MCI in July that its efforts to enter the U.S. market for local telephone service would cost it $800 million this year, twice its previous estimates.

"There can be no assurance as to the outcome of the discussion," the MCI statement said. The merger agreement allows either party to renegotiate the deal in the event of a "material change" in the value of either company.

Analysts said British Telecommunications PLC, which is under pressure from shareholders to reassess the deal, is probably pressing for reductions of as much as 20 percent in the price it will pay for MCI. Under the current terms, BT agreed to pay $6 in cash and a .54 share of each BT American depository receipt for each MCI share, and to assume about $4 billion of MCI's debt.

BT acknowledged Thursday that discussions over the terms of the merger had begun.

"British Telecom has some leverage here, and it's exercising it," said Scott Wright of Argus Research Inc. in New York. "MCI's losses really gave BT an opportunity to say, Look, we like the deal strategically, but we're not going to pay the price we were going to.' "

Most analysts doubted the deal would collapse. "It's important for both of them," Wright said. "It's too late for them to unscramble the egg at this point."

But another trader, who requested anonymity, painted this scenario: "BT could say they're really nervous about this thing, they need protection. They want a 25 percent price cut. MCI says, We understand that, but we can't bring that to our stockholders,' so they can't come to terms. The odds still favor a deal at a very substantial cut. But once you get into this type of situation, really all bets are off."

BT's second thoughts about the price it should pay for MCI are based mainly on the unexpectedly high cost MCI faces in building the facilities necessary to enter the newly competitive $100 billion market in local telephone service.

"The promise of local competition has been much slower to materialize than any of the long-distance carriers wished," said Judy Reed Smith of Atlantic-ACM, a Boston telecommunications consulting firm.

MCI and BT are considering paring down MCI's local efforts by focusing only on markets where local carriers have gone furthest to make networks available to competitors, according to sources at the companies.

But the local market isn't BT's only concern. MCI also has seen stagnant growth rates in its core long-distance business. And the reality that regional Bell companies soon will enter the long-distance market makes MCI's growth prospects in that business less certain.

MCI spokesman Frank Walter denied a report in London's Financial Times that BT also was considering cutting MCI's work force by 5,000 people to lower the company's costs.

"Any reports of discussions with BT concerning MCI staffing levels or head counts are false," Walter said. "No such discussions are under way, nor are any such reductions planned."

The timing of the FCC approval - which was expected next week rather than Thursday - was not a coincidence, MCI and agency sources said.

"It's quite clear the FCC was monitoring the news," said one MCI executive who requested anonymity. "The FCC's concern likely was to ensure that questions of regulatory uncertainty would not have an impact on the outcome of any of the discussions that were announced last night."

Said one senior FCC official: "We decided we should try to get it out as fast as we could. It seemed kind of goofy for us to allow (FCC approval) to be another factor in the marketplace affecting the merger."

The deal would be the largest foreign buyout of a U.S. company, creating a global telecommunications giant with annual revenue of $43 billion and 43 million business and residential customers in 72 countries. BT already owns nearly 20 percent of MCI.