A Business section article Sept. 6 on WorldCom Inc.'s acquisition of 55 percent of Digex Inc. through its purchase of Intermedia Communications Inc. erroneously said shareholders of the three companies approved the deal on Friday. The three firms' boards of directors have approved the deal, but Intermedia's shareholders must still vote on the plan. The date of that vote has not been set. (Published 09/07/2000)
WorldCom Inc. said yesterday that it will purchase Intermedia Communications Inc. to get a majority stake in Beltsville-based Digex Inc., in a stock deal valued at $6 billion.
WorldCom will exchange each share of Intermedia common stock for $39 of WorldCom common stock, a transaction worth about $3 billion. In addition, WorldCom will pay off approximately $3 billion of Tampa-based Intermedia's debt. The deal, which gives WorldCom 55 percent equity and 94 percent of the voting power in Digex, was approved by all three companies' shareholders on Friday.
It is the first acquisition for WorldCom since antitrust regulators scuttled a proposed merger with Sprint Corp. earlier this summer. WorldCom has been moving in recent months to bulk up on its Internet business. Digex, which runs Web sites and other online operations for businesses, will give WorldCom more Web services to sell to its business clients even as it strongly considers exiting its consumer long-distance business.
Bernard J. Ebbers, WorldCom's president and chief executive, said Digex will remain an independent entity and will continue to trade as a separate stock. WorldCom's sales force will sell Digex products and services, he said.
Mark Shull, president and chief executive of Digex, said the company's structure, including its management, will remain the same and no layoffs will result from the deal. Digex, which is expanding into a new building in Laurel this fall, employs 1,200 people, about 900 of them at its current headquarters operation in a five-building compound in Beltsville.
Although Digex's minority shareholders might have benefited more in the short term if Digex had merged with another Web hoster as had been rumored, in the long term, WorldCom's sales force and resources will "provide us the vehicle and capabilities to be the global leader," Shull said.
Digex minority investors, nonetheless, were disappointed that WorldCom was not offering to buy their shares, as well. Digex shares plummeted 20 percent yesterday, closing at $67.88. WorldCom shares were down 8.6 percent to close at $33.75.
Despite the drop in his company's stock price, Shull was pleased with the deal.
"From our perspective, we keep our culture, but we also gain their network, 28 additional data centers, a worldwide sales force and support in the form of fundraising," he said. For example, Shull said, whereas only a handful of Digex's current 700 business customers are international, access to WorldCom's data centers--which are concentrated in the United States, Europe and Asia--will allow Digex to expand its international operations rapidly without having to build its own expensive centers.
Ebbers said that for Clinton, Miss.-based WorldCom, the acquisition represents an opportunity to change its strategy in the Web hosting market, a rapidly growing industry that involves maintaining business clients' Internet data.
WorldCom already offers Web hosting through its Northern Virginia subsidiary UUNet, which offers a more laissez-faire service that rents out space at its data centers where clients manage their own hardware. From now on, WorldCom will be selling Digex's products and services, which are different and more profitable because the data servers are managed and maintained by Digex. UUNet's hosting services will probably "ultimately be discontinued," Shull said.
Analysts and company officials do not expect any regulatory objections to the deal, which is expected to close early next year.
Despite assurances of Digex's continued independence, Jilani Zeribi, an analyst with research firm Current Analysis Inc. in Sterling, said, "If the past in any indication, WorldCom will inhale" Digex's operations. "WorldCom is horrible at running little subsidiaries, [so] I would be willing to bet the farm that you see Digex really being brought in-house from a product-and-services standpoint," he said.
Todd C. Weller, an analyst with investment firm Legg Mason Wood Walker, said the deal gives Digex a much larger sales force, and access to WorldCom's medium-size and large business customers. It's a winning deal for Intermedia's shareholders as well, because the sale erases the company's troublesome debt and gives them equity in WorldCom. At the $39 exchange price, WorldCom is paying a 70 percent premium over Intermedia's Friday closing price.
Digex, one of the Washington area's early Internet service providers, now hosts and manages Internet servers for its business clients and has grown from a Greenbelt basement operation when it was founded in 1991 to a publicly traded company with $59.8 million in sales last year. Digex, which originally went public in 1996, was purchased by Intermedia for $150 million in 1997, only to spin off and go public a second time last year.
In July, Intermedia, heavily in debt, said its revenue projections for the year would fall short and announced it would consider a buyer for itself or its 55 percent interest in Digex.
Besides Digex, Intermedia provides telecommunications services to 90,000 business and government clients. Intermedia has a 2,000-mile fiber-optic network, mostly in the Southeast, and is one of the largest competitive local exchange carriers (CLECs), offering local and long-distance phone service in 14 cities. While Intermedia does have overlapping operations with WorldCom, WorldCom officials were not certain yesterday if they would divest of any of Intermedia's CLEC operations.
An Urge to Merge
WorldCom Inc. has been known for its acquisitive nature and has made several major deals in recent years. The Intermedia deal is its first since its deal with Sprint Corp. fell apart over the summer.
August: WorldCom agrees to merge with Omaha-based MFS Communi-cations Co., which at the time was building local phone networks in more than 50 cities. The purchase would also include Internet company UUNet Technologies of Fairfax, which MFS purchased earlier in the same month.
September: WorldCom agrees to acquire CompuServe from H&R Block Inc. and America Online Inc.'s network services division, ANS Communications. WorldCom will then give most of CompuServe's subscribers to AOL but keep CompuServe's transmission network.
October: WorldCom announces agreement to acquire St. Louis-based local phone company Brooks Fiber Properties Inc.
November: WorldCom announces agreement to merge with D.C.-based MCI Communications Corp., at the time the nation's second-largest long-distance telephone company and also provider of other telecommunications services.
January: Merger with Brooks Fiber Properties completed.
February: Merger with CompuServe completed.
September: Merger with MCI completed, forming MCI WorldCom.
October: WorldCom and Sprint Corp. agree to what at the time would be the largest corporate merger in history, combining the nation's second- and third-largest long-distance carriers. But the merger immediately raises antitrust questions.
June: The Justice Department files suit to block the WorldCom-Sprint merger and the European Union votes to block the deal.
July: WorldCom and Sprint terminate their merger agreement.
September: WorldCom agrees to acquire Intermedia Communications Inc. and thereby gain a majority stake in Beltsville-based Digex Inc., a Web-hosting company. Intermedia has a 2,000-mile fiber-optic network, mostly in the Southeast, and is one of the largest competitive local exchange carriers, offering local and long- distance phone service in 14 cities.
SOURCE: WorldCom Inc. and news reports