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Category: MERGERS & ACQUISITIONS The force behind the deals that have made WorldCom King of M&A.
Joseph McCafferty, CFO Magazine
September 1, 1998
In this era of megamergers--9 of the 10 largest deals in U.S. history were announced this year alone--it's pretty hard to stand out from the crowd. But Jackson, Mississippi-based WorldCom Inc. has transformed itself into a powerhouse through mergers and acquisitions in such a short time that it has been difficult not to notice.
Last October, for example, WorldCom, which started out as a small mom-and- pop discount long-distance company in 1983, stunned the telecommunications industry with an unsolicited bid for MCI Communications Corp., a company more than three times its size. But while MCI may be WorldCom's largest deal to date, it was a series of bold mergers, including 17 since the end of 1994, that thrust the company to the top of the industry.
The behind-the-scenes architect of all these deals has been WorldCom CFO Scott Sullivan, a 37-year-old whiz kid who learned the M&A game at General Electric Co., where he audited potential deals in the 1980s. "He is one of the brightest CFOs I have ever met," says Tony Ferrugia, who follows WorldCom as an analyst for A.G. Edwards & Sons Inc., in St. Louis. "Not every CFO is cut out of that mold. He just gets it."
Sullivan came to WorldCom through a merger in 1992 with Advanced Tele-communications Corp., where he served as CFO and treasurer. "It takes a dedicated, astute, and uniquely qualified CFO for an organization to accomplish what WorldCom has over the past three years," says Bernard J. Ebbers, founder and chairman of WorldCom (formerly known as LDDS). And Sullivan, he says, possesses a unique understanding of WorldCom's business strategy and an uncanny ability to communicate the value of its deals to Wall Street. "He has no peer in his ability to earn the trust and confidence of the investment community," says Ebbers.
Three at a Time
After its landmark acquisition of MCI is complete (sometime in third-quarter 1998), WorldCom will be the second-largest telecommunications company in the world, with revenues of $30 billion. But what made the deal truly astonishing was that it was accomplished in tandem with two other major transactions. One, in fact--the acquisition of CompuServe Corp. and parts of America Online Inc.--was even more complex than the MCI offer, says Sullivan. "They had a mixture of business and consumer customers that didn't quite fit, so we worked with AOL to come up with something that benefited everyone," he says. It was a three-way deal, like something out of the National Hockey League. WorldCom purchased the Internet company from H&R Block Inc. in a $1.2 billion stock swap. WorldCom then turned around and traded CompuServe's content and subscribers along with $175 million in cash to rival AOL, for its ANS Communications Inc. subsidiary, which provides Internet access to large corporate purchasers. The deal also included a five-year contract for WorldCom to provide AOL with network services. WorldCom kept the CompuServe Network Services division, a provider of network and Internet services to businesses.
While WorldCom was busy divvying up CompuServe, it was also in talks with Brooks Fiber Properties Inc., a competitive local exchange carrier based outside of St. Louis. The company was acquired in a $2 billion all- stock deal using the pooling-of-interests accounting method. It was a perfect fit with WorldCom's core strategy of offering end-to- end communications-- that is, to be able to complete a call from New York to Paris without ever using another company's services. To do that, WorldCom needed to purchase local carriers in major cities. It was a vision that Ebbers had anticipated when legislation in 1996 made it legal for long-distance companies to own local carriers. "It became apparent that we would not make money by reselling local services," says Sullivan. "We realized early on that we'd need to build local capacity, or acquire those assets," he adds.
Landing The Big Fish
And acquire it did. In December 1996,World-Com merged with MFS Communications Co. in a stock swap worth $12.4 billion. It acquired local capacity in 50 cities in the United States and Europe. Brooks Fiber, which closed in January, added another 30. WorldCom's other deals, including Uunet Technologies Inc., Williams Telecommunications Group Inc. (WilTel), and IDB Communications Group Inc., have also added important Internet, local, and long-distance assets.
Still, it is the MCI deal that has become the stuff of legend. It wasn't quite on Sullivan's radar screen when, preparing to board a plane, he spoke to Eduardo Mestre, co-head of investment banking at Salomon Smith Barney, who was representing Brooks Fiber. "We were having trouble agreeing on the purchase price on Brooks," says Sullivan. MCI came up in conversation when Mestre was "moaning about arbitrage losses to Salomon in the deal," says Sullivan, due to a lowered bid by British Telecom (BT), announced that day. "On a whim I said, 'We might be able to help out.'"
Sullivan began running numbers on the flight back. He found that a WorldCom/MCI combination could offer two to three times the synergy of BT's proposed deal. The reason BT was lowering its bid was because of a problem MCI was having navigating the local business environment. It was a problem that WorldCom had already licked when it acquired MFS. "We could offer a higher price than BT, and make it more beneficial to WorldCom's shareholders," says Sullivan.
On October 1, 1997, WorldCom announced an unsolicited offer for $41 per share, or about $30 billion (at that time), for MCI. "We were exuberant. This was putting a stamp on communications history," exclaims Sullivan. At the time, it was the largest transaction in the world-- the classic case of the minnow swallowing the whale. Salomon, the investment banking firm hired to advise on the deal, gave it a 70 percent chance of winning, but the feeling at WorldCom was more certain. "We wouldn't get involved unless we were absolutely sure we could pull it off," Sullivan contends.
The young finance executive worked nearly round the clock, frequently logging 20-hour days, coordinating an army of bankers, lawyers, and WorldCom employees working simultaneously on the three deals. "Eventually, we had more than 200 people over the wall, and had no leaks up to the time of announcements," recalls Sullivan.
There would be a number of roadblocks on the way, including an unexpected cash offer from GTE and a number of antitrust hurdles, but eventually a settlement was negotiated for a $51-a-share ($37 billion) merger.
Some critics have complained that the large acquisitions of this year lack the drama of the Barbarians at the Gatestyle takeovers of the 1980s. Not so, says Sullivan. "There is nothing dull about a story that has a solid financial picture and strategic performance," he maintains. In typical fashion, Sullivan calls the transaction "the easy part. The most difficult part is still ahead." That would be the integration of MCI into the organization. Still, Sullivan estimates that WorldCom is two years ahead of the competition. "We have a head start, but we are not going to be defensive. We have to keep doing what got us there in the first place."