Making UUNet Into A Very Big DealBy Rajiv Chandrasekaran
Washington Post Staff Writer
Monday, September 29, 1997; Page F12
If you use the Microsoft Network, America Online or CompuServe, or access the Internet from any one of 50,000 businesses worldwide, chances are that in the not-too-distant future the electronic information that appears on your screen will arrive largely on the wires of just one company: UUNet Technologies Inc. of Fairfax.
Not quite a household name, even for some of the most ardent techies, UUNet nevertheless provides the infrastructure -- the underground cables and complex electronics -- for big commercial online services and a good chunk of the Internet. That means if you're a Microsoft Network subscriber who lives in Rockville and you call up a World Wide Web site in California, the bits of data that flow from there to here will travel most of the way through data lines and computers run by UUNet.
UUNet, through its parent company, Mississippi telephone company WorldCom Inc., owns more of those cables and computers -- the asphalt of the information superhighway -- than any of its competitors.
And its stretch of road appears to be getting even bigger.
Earlier this month, WorldCom announced that it would spend $1.2 billion in stock and $175 million in cash to buy the data networks of America Online Inc. and CompuServe Inc., which would both be run by UUNet. The deal, which also stipulates that AOL will pick up CompuServe's 2.6 million customers, is awaiting approval from government regulators.
The AOL and CompuServe networks, several industry experts say, will make UUNet an Internet titan. Both come with hundreds of lucrative contracts to serve businesses. Those contracts, combined with a five-year arrangement to provide network services to AOL, are expected to add an additional $1 billion to UUNet's revenue next year. The deal will further strengthen the tentacles of UUNet's network of high-speed data lines, especially in Europe.
"They're in the pole position," said Joe Bartlett, an analyst at the Yankee Group, a consulting firm in Boston. Others recently have taken to calling WorldCom the AT&T Corp. of cyberspace.
The Man With the Plan
The man whom company insiders and Wall Street analysts credit with pulling off the stunning deal is UUNet's chief executive and WorldCom's vice chairman, a brash, electric guitar-playing 46-year-old named John W. Sidgmore. His dealmaking skill and business savvy, several company watchers say, also has been largely responsible for UUNet's phenomenal growth over the last three years.
The AOL-CompuServe deal is Sidgmore's latest and greatest coup. It's one he had doggedly pursued since last December. For months, he tried to work out a purchase of CompuServe, but WorldCom didn't want to fork over as much money as the company's parent, tax preparer H&R Block Inc., was demanding. And Sidgmore didn't really want to run CompuServe's troubled online service.
In January, he approached Microsoft and a large telephone company about entering into a deal for CompuServe, according to a source close to the negotiations, but that didn't pan out either.
Then, in May, over breakfast at the Ritz-Carlton hotel at Tysons Corner, Sidgmore proposed a three-way deal to longtime friend Steve Case, the chief executive of AOL, which also had been looking to buy CompuServe. Case was interested and the negotiations began anew.
Sidgmore's use of the personal touch in forging the deal didn't end there. When the H&R Block board received another offer, Sidgmore took the unusual step of personally appearing before the group to raise the purchase price.
The final transaction turned out to be chock-full of goodies for UUNet. The company gets five years of guaranteed business from AOL, estimated at more than $500 million a year. It picks up 1,200 high-end business customers that used the CompuServe network for an additional several hundred million in yearly revenue. And, on top of all the physical infrastructure, UUNet gets a 750-person arm of CompuServe that builds intranets -- corporate computer networks -- an area in which UUNet isn't very strong today.
And the man who had the business acumen to put those goodies in UUNet's basket was Sidgmore, virtually everyone agrees. "He's a superb strategist," said Peter J. Barris, a general parter at New Enterprise Associates, a Baltimore venture capital firm that was an early investor in UUNet. "He's made a billion-dollar company out of a small, fledgling business in just a few years."
A Bold Bet on the Internet
UUNet had been particularly small and fledgling.
The company was started in borrowed office space in 1987 by Rick Adams, a technical whiz who worked at the Defense Department-supported Center for Seismic Studies in Arlington, where he set up a computer system to exchange data with researchers in other countries. At the time, a researcher like Adams couldn't use the Internet to send his friends messages and files that weren't related to his research work because the Internet -- then funded by the Defense Department and the National Science Foundation -- had an "acceptable use policy" for the network.
UUNet would fix that. Named after an arcane way to send data over networks using the UNIX computer operating system -- the UUCP, or Unix to Unix copy protocol -- Adams's company would let hackers send whatever they wanted to.
Dozens of fellow geeks signed up, but still the Internet was far from becoming a mass medium.
By 1990, though, the NSF had started to relax its Internet usage policies, and Adams began peddling Internet access to businesses. UUNet was joined by several other start-ups, including PSINet of Herndon, ANS Communications Inc. of New York (which later was purchased by AOL and just sold to WorldCom) and Netcom On-Line Communications Inc. of San Jose.
PSINet and Netcom also started selling Internet service directly to consumers, a tack that proved far more lucrative than UUNet's. "UUNet was a technician's and hobbyist's environment," said Joel Maloff, a former ANS vice president and now an independent industry analyst in Dexter, Mich. "It didn't take long for them to get overtaken."
Adams figured the way to compete was to grow his network. To do that, he needed money. To get money, he turned to venture capitalists, who, in turn, wanted to bring in a seasoned executive to take the company's helm.
Enter Sidgmore, a former executive at General Electric Co.'s information services division who was running a software company that he had sold a few years earlier to information-technology giant Computer Sciences Corp. He came to Fairfax in June of 1994, a year in which UUNet would post only $7 million in sales.
Almost immediately, Sidgmore faced pressure from the venture capitalists on UUNet's board to kick-start the company. They suggested a merger with Netcom, so he traveled to San Jose to propose a 50-50 combination.
The merger flopped, though in retrospect, Sidgmore said, "it's probably one of the luckiest things that happened to us." Netcom lost $18.4 million in the first six months of this year.
After his San Jose setback, Sidgmore reached a strategic decision. While his competitors were getting rich from selling access directly to consumers, he decided to steer clear.
"Everyone thought [selling to consumers] was the only logical path for us," he said recently relaxing in his office, which is festooned with a yellow lava lamp and poster of Jimi Hendrix performing at the Fillmore Arts Center in New York. "But everyone else was in that market. And I knew that sooner or later, businesses were going to spend big money on the Internet. That's where we had to be."
But Sidgmore didn't really give up on consumers. Within months, he was knocking on the doors of AOL and Microsoft, proposing that he handle the traffic for their online services. AOL eventually decided instead to buy ANS, the early UUNet competitor; but Microsoft's Bill Gates was interested.
Sidgmore was able to hammer out a deal in which Microsoft bought 15 percent of the then-private UUNet for $16.4 million. Even more important, Microsoft would fund the expansion of UUNet's network throughout the United States and into Europe, paying the costs of the project plus 8 percent profit.
It sounded too good to be true. Sidgmore's board warned him that Microsoft had a bad track record with small companies. Mitch Kapor, a board member and founder of the software firm Lotus Development Corp., told Sidgmore to ask for a list of small companies that were happy with their transactions with Microsoft. "Mitch told me I'd get a blank sheet of paper," Sidgmore recalled.
Sidgmore didn't have much of a choice, though. To become a player, he was convinced UUNet needed a big network. And doing business with Gates seemed to be the only way to get there.
The Microsoft Payoff
It turned out "to be a great deal," Sidgmore said. Microsoft guaranteed that it would pay for the deployment of 40,000 modems on the network -- the largest such project on the Internet at the time. The software giant also became a banker for UUNet, lending the company almost $40 million at favorable interest rates to fund additional network construction.
By mid-1995, the Microsoft alliance had so improved UUNet's fortunes that its initial public stock offering became the third most successful of the year on the Nasdaq Stock Market.
All the while, the company was expanding its network at a furious pace. "Our strategy was to build out across the world before anyone could catch us," Sidgmore said. "Having a big network is a huge barrier to entry for competitors."
Soon, it became clear to Sidgmore that Microsoft's money alone wasn't enough to create the infrastructure he needed. UUNet was paying millions of dollars a month to lease high-speed, fiber-optic data lines from telephone companies. Those costs limited the growth of his network "backbone."
His first thought was to raise more money, but AT&T had just announced it would get into the Internet business with a service called WorldNet. Wall Street analysts figured WorldNet would be the undoing of companies like UUNet, which saw its stock tumble from $78 to $35 in three days. The downturn forced it to scrap a secondary stock offering to finance an undersea data cable.
Unable to go it alone, Sidgmore started thinking about hooking up with a telephone company, and a few fortnights later, UUNet merged with MFS Communications Co. of Omaha in a transaction valued at almost $2 billion. Before that deal had a chance to cool, MFS and UUNet were picked up by WorldCom for $14 billion in what was the fourth-largest merger in U.S. corporate history.
The WorldCom purchase, industry experts say, has turned out to be highly fruitful for UUNet. Through a string of acquisitions -- 40 in the last five years -- WorldCom chief executive Bernard J. Ebbers, a former high school basketball coach who is as audacious a dealmaker as Sidgmore, has assembled an imposing coast-to-coast network of fiber-optic cables. In one notable move in 1995, Ebbers merged WorldCom with Williams Telecommunications Group in a $2.5 billion agreement to get WilTel's 11,000-mile fiber-optic network.
Through these deals, WorldCom has come from nowhere to become the nation's fourth-largest long-distance phone company, behind AT&T, MCI Communications Corp. and Sprint Corp. WorldCom, which concentrates on business phone customers, is on pace to post $7.1 billion in sales this year, and already has a market capitalization exceeding $30 billion.
But voice communications, although currently about 90 percent of the world's telecommunications traffic, isn't the market that interests Ebbers and Sidgmore.
Rather, it is data, which Sidgmore predicts will be 90 percent of telecommunications traffic by 2002. And it is in the data arena that WorldCom -- largely through UUNet -- hopes to squash AT&T and others.
"This is where the growth is and this is where we want to be the dominant player," Sidgmore said.
Racing for the Finish
Getting that call to go through, however, isn't going to be easy. AT&T and other long-distance companies, although initially slow to catch onto the Internet, are making massive investments in their data networks. So are the regional Bell companies, which also are expected to challenge WorldCom in the traditional, long-distance voice market.
But first off comes the task of making all the mergers work, particularly the AOL and CompuServe acquisition. In order for WorldCom to take on the other telecommunications giants, it has to transform its patchwork network into a seamless, streamlined operation.
"It's a significant challenge," said Chuck Davin, the chief technology officer at PSINet, one of UUNet's competitors. "CompuServe has a very elaborately architected network. Integrating that with what they have won't be simple."
And then there are the cultural issues: keeping the loosey-goosey, geeky environment of UUNet alive in the middle of a telephone company, as well as integrating the CompuServe staff (based in Ohio) and the ANS folks (based in New York) with the Fairfax crew. ANS, for one, has long viewed UUNet as an "evil empire" that poached many of its business customers, Maloff said, and "it's going to be tough to keep everyone happy."
On top of that, he said, UUNet faces the simple issue of learning to manage a network that's all of a sudden twice as big.
"Sidgmore has a unenviable task in front of him," said Bartlett, the Yankee Group analyst.
But Sidgmore maintains he's up to the job. Although he decks himself out in business attire -- generally sans tie -- he says he has learned to fit in with the company's beard-and-sandals, hacker culture, something he vows to preserve.
Making the networks mesh will be tricky, he acknowledges, but not impossible. The potential rewards to UUNet, he said, far outweigh the risks.
"You can argue that we're growing too fast and question whether we can manage this all," Sidgmore said. "On the other hand, this is the time to do it. If you're not going to do it now, you're not going to get there. In the next four or five years, the competitive landscape for the next 50 years will be set.
"This is the time to make our mark," he continued. "We think we can overturn the competitive order."
THE MAKING OF AN INTERNET GIANT
May 1987: Founded by former Defense Department researcher Rick Adams as one of first companies to provide commercial access to the then-fledgling Internet. Company starts out with borrowed office space and volunteer labor from Adams's friends.
June 1994: John Sidgmore joins as president and chief executive. He decides not to enter the business of selling Internet service directly to consumers.
January 1995: UUNet enters into a deal with Microsoft Corp. to significantly expand its network to support the Microsoft Network online service. UUNet sells access to the network during daylight hours (when consumers aren't heavily using the Microsoft Network) to other businesses, expanding its customer base.
May 1995: UUNet completes the third most successful initial public stock offering on the Nasdaq Stock Market in 1995.
August 1996: UUNet merges with MFS Communications Co. in a $2 billion stock swap.
December 1996: MFS and UUNet are acquired by WorldCom Inc. for $14 billion.
February 1997: WorldCom announces $300 million expansion of UUNet's network.
September 1997: WorldCom announces its intent to acquire CompuServe from H&R Block Inc. for $1.2 billion in stock. WorldCom gives CompuServe's 2.6 million online service customers and $175 million to America Online Inc. in exchange for AOL's ANS data network division. WorldCom's UUNet division plans to assume control of ANS and CompuServe's data networks, which are expected to generate about $1 billion in revenue next year.
John William Sidgmore
Professional: Chief executive of UUNet Technologies Inc., and vice chairman and chief operating officer of WorldCom Inc.
Previous: CSC Intelicom, 1989-1994; served as president and chief executive. General Electric Information Services of North America, 1975 to 1989; served as vice president and general manager.
Education: BS in economics, State University of New York at Oneonta in 1973
Personal: wife, Randi; son, Michael
Favorite book: "Billy Budd," by Herman Melville
Last movie seen: "The English Patient"
Drives: Lexus and Porsche
Other: has three phone lines at home
TAKING THE MEASURE OF A GIANT
UUNet's dominance in the market can be seen by measuring both revenue and business customers.
Company Revenue in millions
UUNet Technologies $253.2
MCI Communications 165.0
Netcom On-Line 120.5
BBN Planet 118.0
AT&T WorldNet 115.0
© Copyright 1997 The Washington Post Company