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WorldCom not so mighty?
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June 9, 2000: 11:10 a.m. ET
If regulators block Sprint merger, the No. 2 telecom may be a takeover target
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NEW YORK (CNNfn) - Last fall, WorldCom Inc. stood high atop the corporate mountain with an air of invincibility, having just pulled off the largest merger in U.S. history.
Now, eight months later, the telecommunications company is discovering what a slippery slope that mountain can be, as its own shareholders ponder if WorldCom is a mighty acquirer, or just another company waiting to be taken over itself.
As U.S. regulators ponder blocking WorldCom's acquisition of Sprint Corp., originally valued at $129 billion, investors and analysts are already pondering Plan B, which would likely involve the company becoming an acquisition target itself.
"Nothing is out of the realm of possibility," said analyst Richard Klugman, of Donaldson Lufkin & Jenrette. "Deutsche Telekom has made no bones about its desire to do something in the U.S."
Indeed, the company's rivals are patiently awaiting the outcome of the regulatory process. Among those reportedly waiting in the wings to possibly bid on WorldCom include Germany's Deutsche Telekom, which in 1999 failed to merge with Telecom Italia and has said it is looking for U.S. acquisitions, or Japan's Nippon Telegraph and Telephone, the world's largest telecommunications firm.
 Meanwhile, WorldCom (WCOM: Research, Estimates), the largest U.S. long distance company after AT&T Corp., is awaiting regulatory approval of its $115 billion buyout of rival Sprint Corp (FON: Research, Estimates), the No. 3 U.S. long distance company. On May 18, the Department of Justice recommended that the government block the merger with the Westwood, Kan.-based Sprint, according to published reports. Regulators in Europe have also indicated they may block the merger.
Regulators examine deal
The Justice Department and European regulators are scrutinizing the deal over concerns that a merger would reduce competition in the Internet and long distance markets. Speculation has centered on whether WorldCom would be forced to shed its prized UUNet Internet unit. On Wednesday, WorldCom Vice Chairman John Sidgmore said he would cancel the merger before giving the unit up.
Some analysts doubt that the deal will face any real hurdles before it is finalized. "People vastly underestimate that the deal is not happening because of the regulatory rhetoric they are hearing," Klugman said. "People will be surprised at how easy it will be."
However, shareholders are preparing for the worst. On June 1, 54 percent of WorldCom shareholders approved a measure that requires the Clinton, Mass.-based WorldCom to consider rescinding a "poison pill" provision. The tactic, used by companies to fend off takeovers, requires a target's board to give approval of a deal before an acquisition can go through.
A repeal of the provision before it expires in September 2001 would cost WorldCom $20 million in costs, sources said.
"Given that telecommunications is such a dynamic industry, if the Sprint merger doesn't happen there are other deals the shareholders would like to consider without a poison pill," said Candace Johnson, a Communications Workers of America spokeswoman. CWA is a union that represents workers throughout the telecommunications and high-technology industry.
"We think it's important that shareholders are owners of a company," Johnson said.
WorldCom declined to comment on the provision. On Thursday, WorldCom shares fell, closing down 1-1/8 to 41-7/8.
WorldCom to buy?
Failure of the WorldCom-Sprint deal would logically make WorldCom a takeover candidate, echoed Drake Johnstone of Davenport & Co., and potential acquirers, such as Deutsche Telekom or NTT, would likely appear.
"If DT Telecom or NTT come in with an $80-a-share offer, management might have a tough time not accepting such a high offer price," Johnstone said.
But a WorldCom-Sprint merger would make the combined company too large for many others to afford. WorldCom's market cap is $114 billion while Sprint's is $55 billion and Sprint PCS is $50 billion, for a combined $219 billion, Johnstone said.
"WorldCom-Sprint would be one of the largest companies in the world," he said. "Not out of question, but certainly less likely to be a takeover candidate. Doesn't mean it couldn't happen, but less likely."
One analyst, who declined to speak for the record, said a failed merger would cause WorldCom to acquire another long-distance rival.
"Bernie Ebbers is not going to sell the company," the analyst said of WorldCom's Chief Executive Bernard Ebbers. "He would go and buy Deutsche Telekom (DT: Research, Estimates) or someone else." 
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