Ebbers: yielding the best return for shareholders

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Following an aggressive acquisition strategy, WorldCom, now MCI Worldcom, has been transformed from a US national long-distance player, into one of the world's leading telcos. Basil Ballhatchet talks to Bernard Ebbers, the president and CEO of MCI WorldCom, about the operator's strategy and plans.

MCI WorldCom has been one of the biggest success stories in telecoms over the past few years. The company has gained prominence through an aggressive acquisition strategy and an ability to serve millions of US business and consumer customers with a fully integrated package of long distance, local, data, Internet and other communications services. It has one of the largest fibre-optic nation-wide networks in the US spanning over 45,000 miles. The company has over 100 fibre-based, high capacity local networks with direct connectivity to more than 33,000 office buildings. Its seamless network also spans Canada and Mexico. Its Internet business is growing at 70% annually and yields over $2 billion in annualized revenue.

Stephanie Comfort, principal telecoms analyst at Morgan Stanley Dean Witter, explains why she believes that the company has been so successful: "They have been able to heavily focus on the business market. They have been able to focus on a high-margin mix of products. They have been able to successfully integrate a flurry of acquisitions of all sizes, without really stumbling at all. So they have a great track record of execution, a great mix of assets and they have a record of expanding margins that we like."

Bernard Ebbers, the CEO and President of MCI WorldCom, has been the main architect behind the company's rapid rise to prominence. Tom Aust, a telecoms equity analyst at Chase Securities, talks about his acquisition strategy: "Bernie Ebbers certainly has a very strong sense of value in the market and has identified excellent assets. His record demonstrates a very good eye. MFS was right in the heart of a very fast growing, very strategic part of the telecoms business. The same thing with UUnet which had an excellent reputation with its customers. Ebbers saw that was also going to be a real driver for growth, combining those two facilities-based companies with his long-distance customers and network. There is a lot of potential to leverage those businesses. What he did with MCI was to seize on a much bigger US and international platform that they already had."

Comfort believes that MCI WorldCom is now at the forefront of the new telecoms order: "We think that they are one of the best competitively positioned companies in the industry. They have a very attractive mix of assets, both domestic and international. They have been shifting their business from lower margin to higher margin businesses very elegantly over the last couple of years. They will continue to do so: they have some of the highest margins in the industry. They have a scenario that can even see those expanding further. They run a very lean ship from an operating perspective. We definitely think that they are a key holding for any telecoms investor."

MCI WorldCom has adopted a wide-ranging international strategy. It has developed a pan-European telecoms network linking commercial centres such as London, Paris, Frankfurt, Brussels, Amsterdam, Stockholm and Rotterdam. It is developing nation-wide networks in the UK, France and Germany. By the end of 1999, its all-fibre, high-capacity network will span over 7,000 miles. According to Comfort, Europe will be key to MCI WorldCom's international strategy: "I think that they are definitely focused on Europe. The key is to make Europe the central part of their CLEC strategy abroad. I think that is where most of their opportunities are from a growth and regulatory perspective. So I think that you may see them do some ancillary transactions there. They are in a fairly good position in terms of their assets and their role in the Ulysses backbone in interconnecting those networks."

MCI WorldCom has also been scaling up its presence in Latin America and the Asia Pacific. In Brazil, the company has acquired a controlling interest in Brazilian operator, Embratel which has the only nation-wide network in Brazil and one of the largest networks in Latin America.

It has also formed a joint venture with Telefonica Internacional to build an all-digital network to link major business centres throughout Latin America. In the Asia Pacific, the company has ten offices and is looking to expand its presence as the markets slowly start to deregulate.

Wireless is one area where MCI WorldCom has yet to employ its aggressive acquisition strategy. This is likely to change, as Comfort explains: I think their vision of wireless early on was correct, in that it was really a consumer product. To stay away from wireless was the right thing to do. But the paradigm has really shifted. The digital one rate has sort of changed the decision-making process. Clearly, a lot of businesses, both large and small, are making their wireless decisions for their employees and their products. I think that it really does force MCI WorldCom's hand to look at some of the wireless products and some kind of wireless strategy."

Comfort believes that MCI WorldCom may focus on a wireless operator with a nation-wide presence: "The whole idea of a national player with a national footprint has become very important. Our wireless analyst has drawn the following analogy: when you go travelling and stay in a hotel, you always want a hotel that offers a pool and a gym, even though you are never going to use it nine times out of ten, you want to have the feeling that it is there when you pick the hotel. The same holds true of a national footprint. A lot of people buying wireless services are never going to go to Iowa. But they want to know if they ever go to Iowa they can use a phone there and that it will be covered by the rate plan. So they have created this national premium. For that reason I think that MCI WorldCom would go after a national player or somebody that has a pretty broad national footprint."

In an exclusive interview, the President and CEO of MCI WorldCom, Bernard Ebbers describes his views of the industry and the reasons for WorldCom's success.

How do you view the recent period of consolidation within the US? Do you believe the recent merger activity that has taken place is healthy for the customer? Why did you decide to oppose the SBC/Ameritech merger?

Well, some of the mergers that occur are healthy for the customer. If those mergers end up providing an opportunity for the customer to have lower rates and increased services, I think that it is a healthy thing. We opposed the SBC/Ameritech merger, as we felt that it did none of those things.

So in your eyes the SBC/Ameritech merger is anti-competitive?

Yes, it is anti-competitive, as it performs the following function. SBC states that it intends to compete out of the region. And now the region is half the US. And Ameritech, who had started to compete with SBC in St Louis, suddenly withdrew. So it makes a bigger local company, which certainly won't compete with itself.

What cost-cutting measures are you implementing in order to make MCI WorldCom more efficient? Will you be making reductions in the work force?

It is not cost cutting in the traditional sense, where senior management arbitrarily gets rid of this or that expense. It is a process. Under this process every department comes up with its business plan or budget. Each department expects that it is going to have to provide the services attributable to its area. We have virtually completed that process. It is a very thorough process. And we are noticing that appropriate measures are being taken through the organizations: where we have two offices and can consolidate into one office, we do that. Every expense that any department incurs is examined.

Are you selling off surplus real estate for example?

Well, we don't own real estate, we usually lease it. So we are either sub-leasing or getting out of some of the leases, where we can. That constitutes just one example of where we are investigating every opportunity to save money.

Which areas are providing the biggest synergies?

On the line cost side, where we now have access to each other's networks. This is the core synergy that makes the merger work from the numbers perspective.

If I could turn to reports earlier this month about the sale of your IT arm. Does this imply a recognition that you cannot alone deliver the services that corporations need? What are your views on outsourcing?

Well, it is a recognition that SHL was not big enough to compete in the high-end integration services packages that big corporations would like. We have a partner that is in our opinion fully capable of working with us on that option.

As to outsourcing, this is a cost issue. Can you outsource less expensively than you can in-house, while at the same time guaranteeing the same performance levels? WorldCom has done a substantial amount of outsourcing in its history and we are confident that in the right circumstances it works.

Why did you decide to back out of the bidding for AirTouch? Do you feel the company was overvalued?

It is not for us to judge whether any company is overvalued. The stockholders of a company determine whether a company is overvalued. From our perspective it is a matter of, if we were to combine the companies, would it be accretive to our earnings? And we ascertained that it would not be accretive.

Are you looking to acquire a wireless operator?

Well, we have said this a number of times: would we like to have one? Yes? Do we feel that we need a wireless operator? No.

Do you believe that the paradigm has shifted to wireless?

For the consumer I believe that there will be an increased usage on the wireless side. I do not think that is the case for business customers.

How do you view Nextel as a company?

I don't know a lot about them. They are certainly growing their subscriber base. I read the public reports, but that is about it.

How do you view AT&T's digital one rate plan?

I think that it is a very compelling plan.

What was the significance of the recent announcement that sees nation-wide deployment of DSL?

The significance of this recent announcement is that it involves a nation-wide deployment of broadband capability which we need to provide for ourselves, for the benefit of our customers as well as for our large wholesale customers, such as AOL.

How will it change the on-line experience of customers?

It simply provides more bandwidth and bandwidth is the key commodity for the new class of competitive services.

How do you react to claims that, in view of the capital coming on-line, considering Level 3 and Qwest, for example, that the return on incremental investment could decline below the cost of capital?

If that is a reasonable theory, then it certainly would be advantage for a company making those investments with cash flow, as opposed to borrowed money.

Given the high level of investment in the business, is a there a risk that MCI-WorldCom would be unable to obtain a reasonable return on that investment?

No. Our twelve year track record proves that getting a better than reasonable return is our core management competency.

And you believe that will continue basically forever?


Following the acquisition of MCI, you had to sell MCI's Internet business to Cable & Wireless. How are you replacing the loss of this business?

Well, we never missed one day of selling. UUnet, which was a subsidiary of WorldCom, had all the capabilities and even more than MCI-Internet did. In fact it helped us a lot, as we now sell one product instead of two products.

Why have you decided to make Europe the focus of your international investments?

We made this choice, because deregulation is only just beginning to occur in Europe. A competitive opportunity is being developed and Europe is a very significant market on a world-wide basis. And nobody there has any market share to any degree. We think that, given WorldCom's construction of facilities, we have a tremendous opportunity to increase revenues and profits there.

What are your pan-European ambitions?

We want to be a facilities-based provider in all the significant cities across Europe, tying those cities together on an intra-country basis and then across country borders.

Who do you see as your main competitors in Europe?

There are going to be several competitors. British Telecom is patching together a network. You have COLT on the local network side and Hermes on the cross-border side. A lot of competitors are emerging in Europe.

What do you perceive to be your competitive advantages over other new, alternative pan-European operators and incumbents with pan-European ambitions?

Well we certainly have an advantage in that we are substantially ahead of them in the construction cycle. We are the only provider of services in Europe to have not only a European network, but also a significant network in the US and our own trans-atlantic cable, where we can provide services between companies that have offices in Europe and the US, without it ever leaving our network.

How do you view the regulatory environment in Europe? How does it compare with the US?

Well the regulatory environment is about the same. It is the same business and is adhering to substantially the same model as the US followed. I would say that in some instances Europe has arrived at a better solution than the US, in that there is a telecoms Czar in each country in Europe, charged with the mission of developing a competitive environment. So you are working with one person who knows what his assigned job is, rather than five political appointees that we have to deal with in the US.

What regulatory obstacles have you faced in Europe?

We have only faced one regulatory obstacle when we merged with MCI. The European Commission insisted that we sell off Internet-MCI, which was to our thinking bizarre.

Why did you consider its attitude to be bizarre?

MCI did not have one minute of business in Europe. It is preposterous to think that the European Commission took it upon themselves to regulate two American companies, one of which has no business in Europe.

How are you looking to increase your presence within Europe?

Well, we are building more and selling more.

Are there any services that you are focusing on which are in your opinion of particular interest to the client?

The service that we are offering, because we have built the facilities, is on-net services - products where customers receive larger discounts, if they use our network from end to end, whether that be from Brussels to Dusseldorf or Brussels to New York.

What opportunities are there for MCI-WorldCom in the Asia-Pacific market?

We are building networks in Japan and Australia. We are doing everything we can in Hong Kong and Singapore. You are very limited in what you can do in those environments because of the regulatory constraints. Those are going to be great opportunities over a period of time. But you can't go faster than the regulators will permit.

How much progress are you making in Japan? Is the market liberalizing more quickly now?

It is liberalizing. We have a licence to do business there. The construction of a network is always a time-consuming and tedious business. We are going as fast as we can, but it does take time.

Are you building different networks, depending on the country/region?

It is the same network.

How do you view the Chinese market?

We have not participated in that market at this point.

But would you consider investing there?

Yes, if it becomes a viable market, where you can your own facilities. We probably would not become involved in some joint ventures there.

Why did you decide to invest in Embratel in Brazil?

Because it is a fantastic opportunity. Brazil provides a great opportunity for us to try and do what we are doing in Europe, and that is, operating as a facilities-based provider of services in those countries. Brazil is a great market: it was a phenomenal opportunity for us.

Do you perceive other opportunities in Latin America?

As you know, we already have a joint venture with Banamex in Mexico. And we are certainly investigating other opportunities in conjunction with our relationship with Telefonica in the rest of central and south America. But the density determines by and large the potential market size in telecoms. There are not that many densely populated areas in central and south America.

How have you found that recent events in Latin America, such as the devaluation of the real, have affected the levels of return that you would expect to see on your investments?

When we made our investment in Brazil, some of the things we took into consideration were currency fluctuations and possible devaluation of the real. While we have already paid 40 percent of our tender in US dollars, the remaining payments are scheduled to be made in reals.

One of the good things in telecommunications is that in critical times like these, use of telecom systems increases. Obviously, for Brazil's sake, we hope that it will recover.

What was the significance of a recent agreement which saw MCI WorldCom provide global long-distance networking services for federal agencies?

The agreement is significant, because it is a tremendous revenue stream for us.

How hard was it to win those contracts?

Working with the government is usually not an easy thing. But MCI WorldCom has a very capable government sales and service unit, that handles those types of transactions and they did a very good job.

MCI WorldCom has a history of having a very aggressive acquisition strategy. Are you planning any major acquisitions this year?


How will you counter the risk of high attrition, following the acquisition of MCI?

We haven't seen any problem with people leaving the organization. I don't see any problems in terms of different company cultures.

How will the acquisition of MCI affect SG&A expenditure?

Well, MCI WorldCom will operate eventually at an SG&A level, which will maximize efficiency.

What is your projected capex for 1999 and where will you invest it?

It is $6.6 billion. About $1.2 billion is being invested in international operations. Another $600 million is being invested in the long-distance area, about $1 billion in local service.

How do you go about selecting a network supplier? Given that level of expenditure, do you have a set procedure? Is it based on cost?

Obviously it is based on cost, but also on quality. We have a whole department that does nothing but evaluate and certify new types of equipment that come to market that we may need. And once those pieces of equipment have passed our lab, then they can be considered for purchase. And at that point in time, it becomes an issue of how does it fit in with the rest of the network and what is the cost?

What do you perceive to be the benefits of technologies such as DWDM?

It has been tremendous for people that own facilities, because it helps you increase the capacity of your facilities, without having to build any more.

What is your EBITDA target for 1999?

Between $11 and $11.5 Billion for 1999.

What new data services are you planning to launch in 1999?

Well, we don't announce services before we launch them.

What percentage of overall revenues do you expect to come from data services?

Already one-third of our revenues are provided by data, Internet and international of which about 20% is data. This portion of our business - data, Internet and International - will represent roughly two-thirds of our projected growth in 1999.

Which data services have proved to be most attractive to high end users?

All data services are part of a package of communications services that meet high-end users business needs. Obviously we have success with our ATM and Internet services - particularly when delivered on-net. These products offer value in themselves. That value is greatly enhanced on-net.

Where do you expect to be the sources of future revenues?

From all the areas where we do business: local service, long distance, Internet and international.

What do you consider to be the new value paradigm in telecoms? Do you see any shifts in the way that telecoms services are being provided?

We are certainly seeing significantly faster growth in data services, Internet services than we are seeing in voice services. So the capacity of the network is becoming a significant issue for telecoms providers, because these data and Internet services take so much more capacity.

How do you respond to criticisms that you have a legacy network and you need to divert surplus cash flow to stockholders?

I find it hard to respond to something that couldn't be further from reality. That is so ridiculous. We are free cash flow positive. And for 1999 we will cash flow more money than we are spending on capex. One of the good things about having such a significant customer base, as MCI WorldCom does, is that it pays for its capex with cash flow, instead of borrowed money.

We don't have a legacy network. We have a network that is absolutely up. People talk about the networks at Level 3: of course they haven't built any yet. We all build the same network and then exchange parts of it. So our network is just as modern and new.

You said over a year ago: "If you bought $100 of WorldCom' stock in 1989, it would be worth $3,337 today. If you had bought $100 of BT stock, it would be worth $190." How do you explain your phenomenal success on the stock market, compared to that of BT?

Well, BT has done pretty good lately.

Fair enough. But, if we leave aside the management issue, what has in your eyes pushed you so far ahead of the competition?

Obviously I don't spend a lot of time thinking about what we've done. More about what we have to do. I think that it is a combination of things.

First of all, it is a focus on producing revenue from the revenue opportunity areas, where we can grow our revenue most rapidly with the least amount of dollars that it takes to acquire that revenue.

Secondly it is just like any other company: you have to be able to control your operating costs. And WorldCom has been able to do that ever since its inception.

How do you view companies like Level 3?

Well, Level 3 is going to be a good company. They aren't much of a company yet, because they haven't had enough time to build much network. They are in the process of doing that. They are deploying what they call an IP-based network - everybody else is going to do the same thing, it is just a matter of electronics. There is nothing unique in the fibre that they are putting into the ground.

The issue for companies such as Level 3 entering the market is that they claim they will have a lower cost to sales and they are going to have to price their product at substantially less than market levels to obtain business. The question is: how much will it cost them to acquire that business? People talk about the costs involved. But the significant cost, what is going to make the differentiation between companies that are successful or not, is their overhead cost, their SG&A cost. - transport is a relatively small part of the total cost of delivering a telecoms service.

What kind of benchmarking tools do you use for efficiency?

We benchmark ourselves against ourselves: do we accomplish what we set out to do from our budgeting process.

What do you consider to be MCI WorldCom's key differentiating factors?

I think that is quite evident: our ability to produce revenue at a very significant cost advantage over others, our much more efficient overhead structure and as a result a much better return for our shareholders.

What are your hopes and ambitions for the company over the next few years?

To continue doing what WorldCom has done in the past.

Where do you hope to position the company on the US and international telecoms landscape?

We intend to continue to operate and attempt to produce for our shareholders the best return of any telco in this country and for our customers, the best service at the best value.