MCI Communications Corp. Chairman William G. McGowan yesterday said International Business Machines Corp. has already indicated a willingness to spend more than the $400 million that it has said it would invest in MCI over the next three years.
"They have committed to a $400 million investment, at least so far," McGowan said in an interview, repeating the figure used in Tuesday's announcement of the alliance between the world's largest computer company and the second-largest long-distance company in the United States. "They've said verbally there may be more financing."
In the pact, IBM agreed to turn over its unprofitable business communications subsidiary, Satellite Business Systems, to MCI with its debts paid off. In return, it will receive 16 percent of MCI's common stock with an option to buy another 2 percent over the next three years. IBM also said it would invest another $400 million in MCI's securities -- but that it would not hold more than 30 percent of MCI stock.
McGowan indicated yesterday that the $400 million is only a beginning. If IBM already has met its 30 percent limit on common stock purchases once that amount has been spent, additional investment could be made through the issuance of preferred stock or convertible or preferred debentures, he said.
Some investment community analysts suggested that IBM eventually may purchase all of MCI. "I think it's a possibility," said Steven G. Chrust, an analyst with Sanford C. Bernstein & Co. "Within two years, IBM will have a clearer view of the regulatory environment, a clear idea of MCI as an investment and a business and a view of its success."
Chrust predicted that IBM would "hold its position or buy up the company" at that point.
IBM has a history of acquiring businesses it needs piece-by-piece. One example was its purchase of Rolm Corp., a telecommunications equipment manufacturer, said Harry Edelson of Edelson Technology Partners, a New Jersey venture capital firm. "We already had this pathway before, where IBM said it would limit its purchase of Rolm to a minority position, and soon thereafter IBM bought the whole company," he said. "We have a precedent, so it's certainly possible" that IBM will acquire all of MCI, he said.
MCI and Rolm are different companies acquired for different reasons and with different corporate mentalities, said McGowan. IBM will maintain a "hands off" approach to MCI, he said. But he added IBM's 30 percent investment is consistent with "a tradition" established by IBM of buying a piece of a company before buying it in its entirety.
For the time being, "I think they made a decision we're better off independent to run this company," he said. In the Rolm situation, McGowan said Rolm asked to be acquired by IBM because "their engineers and Rolm engineers were having terrible fights about what the equipment should be," he said. "We're in a different situation; we bring to the party telecommunications services in which we are much better than they. . . . Their interest is in hardware."
Nevertheless, "further down the road, in two years or so, I think there will be a decision made by IBM -- should we own MCI?" said Douglas F. Whitman, an analyst with Hambrecht & Quist. "I think in the short term there is an in-between solution -- to joint market together," he said.
As telephone and computer technologies merge, MCI's extensive telephone network gives IBM a pipeline for high-speed data transmission, while IBM brings large corporate clients to MCI via Satellite Business Systems, Whitman said. Together, that enables MCI and IBM to market complete private networks that include hardware, software and transmission facilities for large corporations.
IBM already has invested in Sytek Inc., the largest company in the business of providing local area networks that allow office computers to communicate with each other. That firm is working on solving the major problem in the computer industry -- allowing different computer makes to communicate with each other, said Whitman.
Meanwhile, IBM and MCI together can provide "the complete package" of computer systems and services as data transportation needs grow, he said. Currently, data accounts for only 4 percent of the annual $60 billion long-distance market, said Whitman, but it is growing at a rate of about 20 percent a year.
McGowan said MCI is aiming to do just that. "All of a sudden, we get depth in national marketing and large data management systems," he said. Meanwhile, IBM "has been playing a violin with one string.. . . We offer them a data transport network."
"You are starting to have government and large corporations saying, 'I'd like to have a bid for a network.' They want software, hardware and a network, and that is where IBM and we are going to be viable competitors" against American Telephone & Telegraph Co., he said.
The move also gives IBM, the largest computer company in the world, MCI's broad base of residential customers, to whom IBM can offer other data services such as videotex, said Edelson. On the other hand, MCI benefits from its new ownership of SBS because of the latter's large corporate accounts.
Some analysts were more cautious about whether IBM really wants to make a firm commitment to the residential long-distance business for which MCI is competing against AT&T, GTE/Sprint and other companies. They said they view IBM's move as a warning to AT&T not to go after the computer giant's main business.
One strategy "might be that IBM definitely does not want to get into a price war with AT&T, and they sure don't want AT&T to start a price war in computers," said John S. Bain, an analyst with Shearson Lehman Brothers.
"Here we have AT&T acting like a smart aleck in the computer business, and IBM has rolled out the cannon and said, 'You can do a lot of damage to our business and we can do a lot of damage to yours.' Both companies are best served . . . to try and manage the business in a more conservative way that makes money," he said.
Meanwhile, Moody's Investors Service yesterday said it was reviewing the possibility of upgrading MCI's long-term debt rating because of IBM's 30 percent share in it.