It wasn’t the ideal way to announce a mega-merger. On Friday, November 1 last year, news leaked out that something was afoot between British Telecom and MCI Communications Corp. The papers were full of it on the Saturday morning and the companies had less than 48 hours to calm the storm before the markets opened on Monday. Analysts were called in from their country retreats on Sunday to hear the official story.
Not the way anyone would want to handle such an announcement. But by most accounts BT and MCI pulled themselves out of the original hole admirably and followed it up with a comprehensive communications effort aimed at analysts and investors. The result of the merger, they told the markets, would be a new ‘premier global telecoms company’ known as Concert, building on the BT-MCI alliance which dates back to 1993. Joint annual revenues are projected at over $42 bn, annual cashflow from operations at around $12.3 bn.
‘Concert will be well placed to play a leading role in the major growth areas of the changing global communications marketplace,’ said Iain Vallance, chairman of BT, at the original announcement. The companies still await US regulatory approval for the deal à which has stymied some of their communication efforts à but, in the meantime, the merger has been well received by the market. And that’s partly due to a well-coordinated IR program on both sides of the Atlantic.
‘Overall, they’re perceived to have done a good job on the IR front,’ says Ian Johnston, senior telecoms analyst at JP Morgan Securities in London. He chuckles that it was unfortunate that the original announcement had to be made at the weekend but adds that if the share prices are anything to go by, BT and MCI have more than made up for the initial hiccup.
What’s Over There?
Johnston says that, because he works for JP Morgan, it’s been relatively easy for him to get up to speed with the US side of the deal. For other UK analysts, though, the support provided by both companies has been key. Tressan MacCarthy, telecoms analyst at Panmure Gordon, values the presence in London of Mike Broder, a member of the MCI IR team, to answer her questions. ‘The people at BT admit it when they don’t know the answers on the US side, so it’s been really handy to have him to speak to in our timezone,’ she says. That’s been backed up by an arranged trip for UK analysts to MCI headquarters in the States.
‘The problem is that people know the domestic and immediate foreign operations of the companies very well,’ says John Clarke, telecoms analyst at Daiwa Institute of Research Europe and one of the few UK analysts who has been covering BT since it first went public. He notes that both companies have strong IR track records and have lived up to this since the announcement. The challenge now is to provide enough information without being misleading on what remains an unknown entity. ‘It’s difficult to isolate the value of Concert,’ says Clarke. ‘The companies have been fine on giving information operationally and conceptually but not so good on the hard numbers. The problem they have is that you could almost come up with any figures. It is genuinely difficult to isolate assets, costs, revenues and the like à particularly when many assets are held across borders. They’ve been as helpful as they can in the circumstances. I’m genuinely sceptical of trying to value a company on a parts basis.’
MacCarthy backs up Clarke’s view. She points out that BT has been concerned not to put the cart before the horse but has kept analysts as well informed as possible.
The key IR story for analysts, it seems, has been to focus on the synergies of the deal and the complementary strengths in the liberalized telecoms markets of the UK and US in the future. Johnston at JP Morgan welcomes that approach. ‘It’s probably been more important than potential cost savings focused on operating costs,’ he says, adding that the joining of Spain’s Telefonica into a loose alliance with Concert helped stress the global strategy.
Questions Answered
UK fund managers seem to have been soothed by a similar strategic approach and access to senior management through a roadshow back in March. Graham Wood, head of UK equities at Standard Life in Edinburgh, says that the extensive presentation they received answered most of his questions. Now it’s a case of sitting back and waiting for the regulatory hurdles to be overcome. He points to his confidence in senior management à such as Peter Bonfield, CEO-designate of Concert à being able to overcome the clash of the two corporate cultures. ‘I hope that if the operational strategy is sound they can manage the people issues with a lead from senior executives.’
Wood’s colleague, Guy Jubb, head of corporate governance at Standard Life, adds that he had one or two concerns over remuneration issues relating to the challenge of melding MCI’s highly entrepreneurial culture with that of BT. But the companies have done the rounds listening to investors’ worries and giving their side of the story. ‘They have certainly taken the trouble to communicate and discuss the issues with shareholders.’
Indeed, the only really disgruntled audiences of the merger story in the UK so far may be those sitting at home in their armchair wondering what it’s all about. One long-time private investor in BT says that he hasn’t received any information on the merger over and above the calendar corporate literature.
‘I know some things from reading the papers but I’ve certainly not had anything specific from BT on the deal,’ he says. ‘The frustrating thing is it aims all the private investor information at consumers. It sees the small investor as a potential client rather than informing them of the strategy going forward into the new millennium.’ One thing he is sure of, though, is that he is due a special dividend. Some messages always seem to get through.
State-Side Activity
US investors, like most Americans, feel pretty strongly about baseball, mom and apple pie. They also have a special place in their hearts for a feisty, entrepreneurial company which takes on the big monopoly in town and wins à the old David versus Goliath saga. And they have no end of affection for a company, which over the years has grown and grown and made them a bundle of money in the process.
Now what would their reaction be when they learn their young antitrust-buster and champion of the slingshot is being swallowed up by another Goliath, and a British one at that? Somehow the David in our story has won over its US supporters yet again.
In contrast to the UK, the weekend timing of the original announcement was appreciated by analysts, among them Janney Montgomery Scott’s telecom analyst Anna-Maria Kovacs. ‘They did a whole series of conference calls that Sunday, and managed to reach just about everybody,’ she says. ‘By the time the stock opened, the story had been reasonably well absorbed.’ MCI and BT then marched out for a series of joint meetings in New York with institutional investors and analysts. Subsequent one-on-one meetings around the country, regular quarterly conference calls, quarterly reports, and Web postings all combined to pump analysts and investors full of confidence over the deal. ‘We’re trying to get the message out there,’ affirms Michael Kraft, MCI’s director of investor relations.
Even MCI’s spartan annual report, while containing very little else besides the chairman’s letter and management’s discussion and analysis, gives a lot of column inches to the merger. Most recently, in mid-June, a special meeting was held in New York to educate US analysts about BT – with audio and slides broadcast over the Internet to reach a wider audience. ‘For those of us who don’t cover BT, it’s very helpful,’ notes Kovacs.
Half the Battle
Getting the message out to analysts and investors was clearly half the battle. But just what was the message? The same bullet has been slammed into the breach again and again beginning with the headline of the first press release on November 3: ‘MCI and BT announce largest international merger in history. Move creates first global communications company for the 21st century.’
The assumption, perhaps, was that nothing could be more appealing to Americans than sheer bigness. Actually it is not that simple. ‘Bringing two giants together is not necessarily a good move,’ pooh-poohs Frank Governali, a star telecom analyst with Credit Suisse First Boston, ‘but in this case, it is.’
‘Concert will be a global telecom powerhouse with the ability to offer multinational corporations seamless networks on a global scale,’ confirms Guy Woodlief, telecom analyst for Prudential Securities.
Governali goes on to say MCI did a good job of focusing on the investor implications of the deal à ‘that the new company is going to be stronger financially and operationally in the longer term; that it has a greater opportunity to address bigger and broader markets; that it will be more competitive and generate earnings growth of 8-10 percent; and that shareholders will be immediately rewarded with a good take-out price for MCI.’
Perhaps there’s the hook for state-side investors. ‘It’s a great deal à especially for MCI shareholders,’ says Philip Wohl, telecom analyst with Standard & Poor’s Equity Group. ‘It’s similar to the Bell Atlantic/Nynex merger, where Nynex shareholders made out like bandits because their company wasn’t really going anywhere. MCI had a limited run in the US, and probably peaked as a growth company. But with Concert, it’s really going to do some things, especially internationally.’
Wohl adds that Concert has opened the floodgates for a lot of other mergers, noting that there is practically no worry about regulators blocking the deal: ‘It’s not a case of wait and see, it’s a foregone conclusion. And it was a smart thing to set up the Concert relationship beforehand so alliances can go ahead even if the merger takes a while.’
Culture Clash
But if the deal is as good as inevitable, many investors believe a culture clash is too. After all, MCI is notoriously scrappy à seemingly at odds with BT’s sober traditions. ‘The two cultures are very different, and it will be interesting to see how they will be integrated into each other,’ muses Woodlief.
‘I’m not worried,’ says Wohl at S&P. ‘They’ll both operate as they were.
Here’s what MCI chairman Bert Roberts says in his annual report letter: ‘Concert will be well-positioned to capitalize on the enormous potential of rapidly emerging global opportunities because it will be grounded in MCI’s unparalleled heritage of, and passion for, competition.’
That’s similar to the way Stephanie Babich sees it. ‘It’s going to be difficult from a cultural perspective,’ admits this director of Fitch Investor Services, a Chicago-based credit rating agency. ‘But from a strategic perspective, it makes sense to bring MCI and BT together because their skill sets are complementary.’
Even better, from a credit perspective, the two companies’ balance sheets are going to mesh very well. ‘They’re going to have a lot of financial flexibility,’ Babich says, citing as an example the massive $10 bn bank loan facility being lined up for Concert in mid-June, priced at 10 basis points over libor à ‘very, very tight pricing.’
MCI: born in the 1960s as a foil to Ma Bell, weaned on junk bonds, and graduated to investment grade. Now the debutante is getting married off. Investors on both sides of the chapel seem to be thrilled – but they’re still waiting for after the honeymoon.
Tuning Up Online
‘This is the idea behind Concert. The first communications company for the world.’ Point your browser towards Concert’s Web site (www.concert.com) and you’re greeted with the image of a squashed-up globe. The continents have all been moved together to form one large land mass. Airlines had better watch out: the world, it seems, will be a smaller place if BT and MCI get the nod from the regulators.
No instructions are offered to get past this image of global compression. No buttons, no pointers, no map. Surfers are just expected to deduce that the Concert will start with a random click of the mouse. The Web-shy and technophobic are not invited to the party.
Get through the first test and you’re into a slick, well-structured site – all you’d expect from two telecoms giants. ‘Businesses and consumers today demand telecommunications solutions that work seamlessly across national borders and time zones,’ states the introductory text under the heading ‘The Opportunity’.
It’s all neatly set up with easy access to a mass of information on both companies, a historical overview of the development of the UK and US telecom markets and a look at the future Concert may bring. Don’t expect too much detail on that future, though. It’s full of promises but little real information on projected figures. The real figures won’t start to be revealed until the companies are given the all-clear to go ahead with their merger.
Potential investors on the Web are treated to some simplified calculations of what it all could mean. BT’s annual revenue is simply added to MCI’s to give a Concert projection. And nor is there talk of rationalization post merger: BT’s 129,000 employees get lumped together with MCI’s 55,000 to form a grand total of 184,000.
If you’re looking for background, however, the site is difficult to fault. Individual investors who feel shut out of the information loop can get a good grasp of the deal from flicking through the site. A quick straw poll of analysts and fund managers reveals few who have accessed the site. Most seem more than happy with the hand-holding they are receiving direct from both companies and few think there would be any more to gain from accessing information on the Net.
That could all change if the Concert vision becomes a reality. For the time being, BT and MCI aren’t doing themselves any spurious favors with the Web site. There are no fancy graphics which take ages to download. Anyone would think they couldn’t care less whether you stayed online.
