Reaction in London to British Telecommunications Plc’s stunning marriage to MCI Communications Corp has been predictably negative: why can’t the company simply hand out its surplus cash to its shareholders instead of investing it in these risky ventures in the hope of winning business from that tricky character, Johnny Foreigner? Reaction in Washington and New […]
Reaction in London to British Telecommunications Plc’s stunning marriage to MCI Communications Corp has been predictably negative: why can’t the company simply hand out its surplus cash to its shareholders instead of investing it in these risky ventures in the hope of winning business from that tricky character, Johnny Foreigner? Reaction in Washington and New York has been the reverse: the pact is seen as a dream deal for MCI, and a serious challenge to AT&T Co – which is seen as so threatened by the collaboration that it is thought in some quarters that it might decide to pay way over the odds for Cable & Wireless Plc. How is the deal seen in Paris and Bonn? That is the real test, and if France Telecom SA and the Deutsche Bundespost Telekom are not cast into the deepest gloom, faced as they are with the prospect of sharing each other’s market and dominating the Luxembourg market, it would be very surprising.
Telekom’s is the harder case: the German phone company, whose only excitement presently lies in the grim effort to wire the former East Germany, is itching to be free to modernise and to get out there into the wider world and take British Telecom on at its own game, but the state corporatist tendency in Germany is still so strong that the company at best can look to no more than a very partial privatisation in three years’ time. By then, British Telecom will be looking to the end of the bar on its entering the cable television market and should be gearing up to bring to the UK all the multimedia video on demand fun and games in which MCI plans to invest a lot of Telecom’s money. France Telecom is laboriously negotiating some kind of alliance with AT&T, a company that has been burned so badly once in its relationships with Europeans that it insists on effective control over anything it enters: AT&T’s horrendous experience in computers with Ing C Olivetti & Co SpA – and to a lesser extent with Philips Electronics NV – has made the company pathologically risk-averse in the structuring of its foreign adventures. For the benefit of sceptics, it is worth noting at this point that AT&T and British Telecom in their present forms are almost exactly the same age, and have been up the same steep learning curve. The British company’s Mitel Corp adventure was a lot less costly than AT&T’s alliance with Olivetti, but AT&T seems to have got things right with its acquisition of NCR Corp, few question its long term goal of taking over McCaw Cellular Communications Inc, and it is justifiable to assume that British Telecom, which has made a modest success of its Tymnet and Dialcom acquisitions, has now learned its lessons and has got it right with this one. Is it paying too much for MCI? In the short term, the premium to the market price looks a little rich, but if you want the best, you have to pay for it, especially when there is only one available second best, Sprint Corp – whose price for any deal must have soared on Thursday afternoon. Sprint is loosely in the Cable & Wireless camp, being the partner that finally ended up holding the US end of Cable’s PTAT-1 fibre optic transatlantic cable.
Moreover, we’d be surprised if the MCI share price didn’t reach the $64 average that British Telecom has agreed to pay for its stake – new Morgan Stanley telecommunications analyst Stephanie Comfort has initiated coverage of MCI with a buy rating and has set a 12-month price target of $70 on the shares, against the $54.875 at which they were trading late Thursday. The credit rating agencies are fairly sanguine about the deal from the point of view of British Telecom fundamentals – Standard & Poor’s Corp has affirmed its – increasingly rare – bluer than blue chip triple-A rating on the company’s debt, Moody’s Investors Service Inc will take a close look at the deal before it makes a decision. The agreement is seen in some quarters as better for MCI than it is for BT, but that is from an American perspective: from an international perspective, MCI had perhaps a score of potential partners, British Telecom’s options wer
e extremely circumscribed. MCI, although less flamboyant than some of the other international players, is now sixth in the world international telecommunications league – British Telecom is fourth, and intriguingly, MCI holds 25% of Infonet Services Inc, the former Computer Sciences Corp international data network in which most of the continental PTTs are smaller shareholders alongside Kokusai Denshin Denwa Co and Singapore Telecom. It is not clear whether MCI’s stake goes into the as yet unnamed joint venture in which British Telecom will hold 75%, although under the terms of the agreement as announced, that is implied. The Far East now becomes British Telecom’s primary focus for the next deal, and the joint venture has been structured in such a way that a third partner can be admitted – and many suspect that that seat is being kept warm for Nippon Telegraph & Telephone Corp, which British Telecom tried so hard to woo into Syncordia Corp. But that is not the only option, and it should not be forgotten that AT&T’s agreements with Kokusai Denshin and Singapore Telecom are non-exclusive. But it begins to look as if a cold entry into the Chinese market in competition with Cable & Wireless may be dictated: the Pacific Rim – where MCI has a small foothold in New Zealand – is by far the fastest-growing telecommunications market, and getting it right will be crucial for the new joint venture. Overall, the global long-distance market is growing at an estimated 15% to 17%, compared with to 6% to 7% in the domestic US market, which again underlines why British Telecom had little option but to get out and about in the world rather than simply resign itself to be battered and browbeaten by the regulators at home. At the time of the break-up of the Bell System, AT&T had something like 92% of the US long-distance market, now it is down to just over 60% and MCI is up to 18%.
The same kind of attrition inevitably faces British Telecom at home – as indeed it should: the fact that the company has enormous international fish to fry means that it will drag its feet much less on further deregulation than would have been the case had it been a pure domestic player sullenly protecting its eroding interests. The deal has been as carefully structured to meet the requirements of the US regulators as the one between British Airways Plc and USAir Corp – but MCI is a rather more attractive partner than USAir. The benefit to Britain of having not one but two international telecommunications players is incalculable and should guarantee that telecommunications services are for many years much better and more comprehensive, and charges are much lower, than they are in continental Europe. New opportunities will emerge, in areas like South America, where Telefonica de Espana SA is already a big player, but for the moment, the biggest prize has gone to British Telecom, and the opportunities for others to ensure they are among the handful of global companies that are confidently expected to dominate the telecommunications world in the early twenty-first century are fast vanishing. This strategic alliance with BT represents the most exciting and promising opportunity of our 25-year history, MCI’s chairman and chief executive Bert Roberts exulted. It is the telecommunications deal of the century.