WorldCom Inc., an upstart Mississippi company led by a former high school basketball coach, beat the telecommunications giants Monday to win a takeover battle for MCI with a $37 billion deal that would be the biggest merger in U.S. history.
The agreement, which is subject to approval by regulators, would transform the landscape of the telecommunications industry. It also likely will speed up merger talks by other companies trying to take advantage of changes in federal rules governing competition.
The combined company, which would be called MCI WorldCom, would be a behemoth selling a full range of services - from local and long-distance to Internet connections - to 22 million customers in more than 200 countries. The new company expects to have $32 billion in revenue next year.
WorldCom’s bid, made up mostly of stock, leapfrogged a $28 billion cash offer from GTE Corp. and also thwarted a $24 billion merger agreement MCI had reached with British Telecommunications PLC.
MCI already is the nation’s second-largest long-distance company, behind AT&T;, and would remain so after the merger with No. 4 WorldCom.
“GTE is a fine company. We didn’t dismiss it lightly,” said MCI chairman Bert Roberts Jr., who would keep that position at the combined company.
But “MCI has made the best possible choice with this alignment with WorldCom. The two companies have complementary strengths.”
GTE said it was reviewing the situation and would not comment on whether it planned to increase its bid. Analysts had given the GTE a slimmer chance of passage with Washington antitrust regulators, because of the combination’s far-reaching power across long- and local phone markets.
The MCI WorldCom deal would eclipse the largest U.S. merger so far, a $25.6 billion marriage between Bell Atlantic Corp. and Nynex Corp. completed in August.
The boards of both MCI and WorldCom unanimously approved the latest bid Sunday night after WorldCom sweetened it by more than 20 percent.
WorldCom executives said they were able to raise the bid so dramatically after discovering $5 billion in extra cost savings over the first five years of the deal it hadn’t noticed when it first bid for MCI early last month. The companies now estimate $20 billion in savings.
One big area of cost cuts is in fees the companies pay other carriers for completing overseas calls. WorldCom said a combined company could save $500 million a year in such fees, up from an original estimate of $150 million.
For customers, the deal is likely to speed the advent of all-in-one packages of telecommunications services on a single monthly bill.
“It gives us an opportunity for reach we didn’t have before,” Roberts said in an interview.
An MCI-WorldCom would be particularly dominant in Internet access, controlling 20 percent of the nation’s market. Regulators are likely to examine the deal to see if such dominance would squeeze out rivals and drive up prices. But several analysts said they expect the deal to clear that hurdle, because there are roughly 4,000 other Internet access providers.
“They’ll be a formidable competitor with a tremendous amount of market clout,” said Rebecca Wetzel, a consultant with TeleChoice Inc., based in Verona, N.J. “But there are plenty of other choices out there.”
The regional phone companies are likely to use the MCI-WorldCom deal as ammunition in pressing federal regulators for permission to expand into the long-distance business. A federal law intended to force more competition in telecommunications has touched off attempts by the industry’s biggest players to get into each other’s businesses.
But the Baby Bells have thus far been refused permission by U.S. regulators who say they haven’t sufficiently opened up their local markets to new rivals.
The MCI-WorldCom deal, though, consolidates the long-distance business with the top three carriers - including AT&T; and Sprint - controlling more than 85 percent of their market.
“That means the Bells’ entry into long-distance is even more in the public interest than before,” said John Schneidawind, a spokesman for BellSouth Corp., which sells local phone service in 9 southeastern states.
The deal is a climactic victory for Bernard J. Ebbers, WorldCom’s president and chief executive, who will remain chief executive of the combined company.
Ebbers, a Canadian who came to Mississippi on a basketball scholarship, was a coach before investing in several businesses, including a small long-distance company called LDDS, which became WorldCom in 1995. The Jackson, Miss.-based company, with 13,000 employees, has expanded through more than 40 acquisitions over the past decade.
His latest prize, MCI, grew from a mobile radio company three decades ago to become the fiercest challenger to AT&T; Corp.
MCI has been spending billions to build local networks of fiber optic cable. That contrasts with plans by Sprint and AT&T; to lease lines from local phone companies. MCI also is a leader in selling long-distance service to large companies.