In the largest merger ever, MCI WorldCom and Sprint confirmed that they are combining in a stock swap valued at US$115 billion, excluding debt. The new company will be named WorldCom. Including debt, the companies said the price tag is about US$129 billion.

The deal was one of Wall Street's worst kept secrets. Press outlets, namely The Wall Street Journal, gave a play-by-play throughout the talks. The MCI WorldCom bid topped a rival bid from BellSouth.

Under the agreement, each share of Sprint will be exchanged for US$76 of MCI WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS Group will be exchanged for one share of a new WorldCom PCS tracking stock and 0.1547 shares of MCI WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint PCS and will track the performance of the company's PCS business.

The actual number of shares of MCI WorldCom stock to be exchanged for each Sprint FON Group share will be determined based on the average trading prices prior to the closing, but won't be less than 0.9400 shares (if MCI WorldCom shares top US$80.85) or more than 1.2228 shares (if MCI WorldCom's average stock price is less than US$62.15).

Sprint chief William T. Esrey will be chairman of WorldCom and MCI WorldCom chief Bernard J. Ebbers will be president and CEO. The board of directors will have 16 members -- 10 from MCI WorldCom and six from Sprint.

Squeezing costs
To make the hefty price tag more palatable for investors, MCI WorldCom said it could cut expenses to maintain earnings.

The companies said the transaction will be "essentially non-dilutive" to MCI WorldCom's earnings per share before goodwill amortization, or cash earnings. The companies said they can squeeze "significant cost savings" out of the combined operations and still invest aggressively in new technologies such as broadband and wireless access.

As for specifics, the companies said they could hit annual savings of US$1.9 billion in 2001 -- the first full year of operation . Savings could increase to US$3 billion annually by 2004.

Savings are anticipated to result from better utilization of the combined networks and other cuts. When WorldCom bought MCI Communications perks like water coolers were reportedly jettisoned. The company said it would save $1.3 billion a year on capital expenditures by 2001 with economies of scale and procurement efficiencies.

The company also said it could boost revenue as it bundles a broader range of services and cross sells to a larger customer base. MCI WorldCom and Sprint will begin cross selling commercial services before the deal closes.

Big get bigger
With the number two long distance carrier MCI WorldCom buying third place Sprint, there's no doubt that size matters.

MCI WorldCom and Sprint will have pro forma 1999 revenue of more than US$50 billion, a market enterprise value of about US$290 billion and operations in more than 65 countries. In Australia MCI WorldCom subsidiary UUNET owns leading ISP OzEmail. The companies also said it would offer a host of broadband services, including Sprint's ION network. MCI WorldCom also becomes a significant wireless player.

The acquisition of Sprint gives MCI WorldCom more than 4 million PCS subscribers and 1.7 million paging and advanced messaging customers.

"Sprint's ability to offer a full range of wireline and wireless services will benefit our customers and fuel sustained double-digit revenue and earnings growth," said Ebbers in a statement.

Regulatory hangups
The early reports on the deal allowed regulators to react to a potential MCI WorldCom-Sprint combination and the early indicators were that the deal would be approved if the companies sold off Sprint's Internet backbone.

MCI WorldCom owns a significant chunk of the Internet backbone with its UUNet operations. To gain approval for its MCI acquisition, WorldCom had to agree to sell off MCI's backbone.

The merger is subject to the approvals of MCI WorldCom and Sprint shareholders, the Federal Communications Commission, the Justice Department, various state government bodies and foreign antitrust authorities. The companies anticipate that the merger will close in the second half of 2000.

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