August 4, 1998

WHO WILL PAY FOR MCI/WORLDCOM TELEPHONE MERGER?

by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—When the two phone companies MCI and WorldCom announced their merger, they were not met with a nationwide strike as when Puerto Rico decided to privatize its phone company. Nor did we see protesters come up against police wielding tear gas and water cannon, as happened in Brazil last Wednesday when its phone company was sold. But that does not mean that no concerns are being expressed by labor leaders.

Throughout the months when the European Union and the U.S. Justice Department were approving the merger, press reports (including my own) focused entirely on the issue of Internet competition. But even though neither MCI nor WorldCom is unionized, the Communications Workers of America subjected their merger to intense analysis. Their predictions bear on both workers and the general public.

Worries over Internet competition were elusive, because companies across several industries are constantly building new capacity and looking at for new customers. Ultimately, MCI satisfied the European Union and Justice Department regulators by selling its Internet service and assets.

Now just one more agency has to determine whether the merger is in “the public interest”: the FCC. And if the public interest includes the job security of thousands and the availability of competition for average phone users, the FCC should consider the concerns raised by the CWA.

The CWA’s critique, aside from the Internet controversy, springs from two observations. First, they think the new company is taking on too much debt to fulfill its promises. Second, they believe it will lay off a number of workers, abandoning in the process their residential users, who are in serious need of more competition.

The phone companies themselves deny all the charges, reaffirming everything they originally promised the regulators. The local phone network will be built, the workers will keep their jobs, and competition will flourish.

The CWA’s first criticism can be found in their brochure, “Taking MCI Out of Local Competition: Eliminating Friends and Family.” Here they say that WorldCom funded its purchase of MCI through risky “goodwill and intangibles,” that they come out of the merger with an extra 7.4 billion dollars in long-term debt, and that the ratio of debt to both earnings and capital has increased.

The authors then draw two conclusions from their calculations. First, MCI/WorldCom will not have the money to string new wires in local markets. This new growth was a key promise made to regulators, because MCI and WorldCom had to show they would increase competition with local phone companies in order for their merger to be in the public interest.

The second conclusion is that MCI/WorldCom will act quickly to reduce expenditures. The CWA says that “synergy” savings that eliminate redundancy are not enough; investment will have to be restricted to lucrative business markets.

To bolster their analysis, the CWA found a Washington Post article indicating that WorldCom intends to reduce the joint MCI/WorldCom investment that they planned to make in local telephone infrastructure. The CDA also quotes a 1997 filing before the Securities and Exchange Commission by MCI, saying that total investment would be 5.3 billion dollars lower than pre-merger projections.

Since business customers offer more concentration and return on investment than residential customers, the CWA deduces that the reductions will hurt the residential users in particular. In their comment to the FCC they say, “savings…can only be realized by a shift in business focus, away from the high costs of marketing, provisioning, billing, and providing customer service to a mass market.”

In addition to the problem of debt, the CWA focuses on job losses. The MCI filing before the Securities and Exchange Commission says that the company laid off 4500 people since agreeing to the merger. More layoffs are to be seen in 20 billion savings that the companies plan through the merger.

At this point, many readers may react with, “Tell me something new. Every merger leads to consolidation and job losses, doesn’t it?” Not necessarily, and not in a growing industry like telecom.

Debbie Goldman of CWA explained to me that many recent mergers among unionized companies came off without a pink slip (at least among unionized employees—some management jobs were lost). After SBC merged with Pacific Telesis, for instance, union membership there grew by 7000 people. Bell Atlantic and Nynex pledged not to lay off union members when they merged, and have kept that pledge. A similar pledge has been made by SBC during the current merger talks with Ameritech.

When presented with CWA predictions, an MCI spokesperson denied the charges and reaffirmed his company’s commitment to residential customers. He said there were no layoffs and that none are planned. MCI itself has grown from 25,000 people in 1990 to 55,000 today.

The image promoted by MCI is that of an audacious upstart, a David that has already defeated at least one Goliath and plans to grow without losing its competitive spunk. The spokesperson pointed out that they introduced competition into the long-distance phone market, and that WorldCom has also come out of nowhere to present a formidable opponent to established companies.

MCI counts 31 local markets, and the combined WorldCom/MCI will have 103. MCI in fact is larger than any other local company besides the incumbents (the Bells and GTE). The spokesperson also denies CWA claims that it is continually losing residential customers, citing “aggressive marketing” to win new users. (I in fact am one of them.)

Wall Street clearly is not afraid of MCI/WorldCom’s debt or their plans for the future. Both companies’ stocks have gone up since the merger. MCI’s reported earnings yesterday were better than expected, although slightly lower than last year.

But why do the shareholders think MCI/WorldCom will do so well? Is it because they will stride deeper and deeper into the territory of the incumbent local carriers, as well as picking up more long-distance and Internet business? The CWA thinks that people buy stock because they like the negative vision laid out by the union: one of shrinking concern for small users, of cherry-picking business customers, and of reduced service in the quest to cut jobs.


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