WorldCom Inc. said Wednesday it will create two tracking stocks that will separate its fast-growing data and Internet businesses from its stagnant consumer long-distance telephone operations at the same time it warned that earnings would slow in the fourth quarter.
The reorganization at the nation’s No. 2 long-distance phone company comes one week after AT&T Corp., the largest long-distance service, said it will split itself into four parts in hopes of improving its share price.
Wall Street’s initial reaction to WorldCom’s news–echoing last week’s response to AT&T–was swift. Shares plunged $4.81, or 20 percent, to close at $18.94 on the Nasdaq stock market.
Although WorldCom’s restructuring is less radical than AT&T’s, it is sufficiently complex to confuse investors, analysts said.
The reduced growth outlook and restructuring come as WorldCom continues to suffer from increased competition, pricing pressure and higher spending to build new businesses such as Web hosting and Internet-based virtual private networks.
“We have let you as investors down. The management team of this company is not at all satisfied with where we are today,” WorldCom Chief Executive Bernard Ebbers said in a meeting with analysts.
Under the restructuring plan, WorldCom will segregate its consumer long-distance business into a division that will carry the name MCI and will support a tracking stock that will pay dividends to shareholders. Shares will trade under the symbol “MCIT.”
Another stock will be issued for WorldCom–trading under the “WCOM” stock symbol–which will handle the company’s business customers and data operations.
A tracking stock reflects the performance of a specific portion of a company’s operations. So far, reception of them from investors has been mixed. Critics say the stocks pose conflicts of interest for directors, who are confronted with different classes of shareholders to please, and that they offer no benefit of getting a public offering premium by offering the piece of business to interested buyers.
The two issues of tracking stock will be distributed on the basis of one share of MCI for every 25 shares of WorldCom an investor holds. WorldCom and MCI will continue to have a single board with Ebbers as the chief executive. Holders of both sets of tracking stock will have voting power based on the market capitalization of the individual stocks.
The restructuring is intended to give investors an opportunity to buy into either the potential high growth of a data communications company that WorldCom hopes to be or the high cash flow of a residential long-distance company represented by MCI, Ebbers said in a teleconference with reporters.
“If we’re not successful in raising the stock price, I won’t be very popular with our shareholders,” Ebbers said in the teleconference.
A few years ago it was WorldCom’s high-flying stock price that enabled Ebbers to first buy MFS Communications and then MCI, even though MCI was a larger company than WorldCom. But this year’s failed takeover of Sprint Corp., the No. 3 long-distance carrier, has proven to be a major stumble for Ebbers.
“It’s not an enjoyable experience,” he said of the Sprint deal, which was killed by regulators this summer. “It’s certainly humbling. Some mistakes were made, some of them mine.”
Whether WorldCom’s reorganization will help restore the company’s luster was not immediately clear.
Immediately after Wednesday’s announcements, Credit Susse First Boston and Merrill Lynch reduced their ratings for WorldCom’s stock.
“This looks like a strategy to exit the consumer long-distance business,” said Susan Kalla, a telecommunications analyst with BlueStone Capital. “People in the business have known for more than a year that revenues from the consumer long-distance business are falling, but they were so preoccupied with the Sprint deal that WorldCom’s executives didn’t seem to notice. They took their eyes off the ball.”
A fundamental trend in the booming telecommunications industry is moving toward a network that mostly carries data from one that mostly carries voice. Voice still accounts for about 80 percent of the revenues in the business, but that is shrinking fast.
MCI’s use of a tracking stock to isolate a large but declining core business from a smaller but growing business is somewhat irregular, analysts said. Usually tracking stocks are assigned to fast-growing businesses, as is the case for Sprint’s wireless operation.
“If you have a wireless business that’s growing at 25 percent a year while your overall company is growing at 5 percent, it’s difficult to motivate your wireless executives with shares in the slower-growing parent company,” said James Andrew, a vice president with the Boston-based Adventis consultancy.
“So you create a tracking stock in the fast-growing company to reflect the good work of those hard-working executives. A tracking stock makes sense in that case.
“But I don’t get a tracking stock for a company in decline,” Andrew said.
“Wall Street has no patience to finance these technical shifts,” said Robert Rosenberg, president of Insight Research Corp., a Parsippany, N.J., telecommunications consultancy.
WorldCom’s reorganization announcement was accompanied by news that earnings will be between 34 and 37 cents in the fourth quarter, below the 49 cents analysts had expected.
MORE STATIC IN THE PHONE SECTOR
Shares of the three biggest long-distance companies–and their wireless tracking stocks–have been battered over the past 12 months, and the problems have deepened since the sharp drop in tech stocks that began after Labor Day. AT&T Corp.’s announcement last week that it would split into four parts was unable to bring the sector back to life, and Wednesday’s WorldCom announcement was met with more selling.
Percentage change for stocks:
Company 12 Year Since Since Wednesday
months to date Labor Day Oct. 24
AT&T -60.6% -56.7% -31.0% -18.1% -5.1%
WorldCom -65.6 -64.3 -48.7 -29.7 -20.3
Sprint -66.8 -65.8 -32.5 -15.0 -9.8
AT&T Wireless — -19.7* -11.0 +9.6 -5.0
Sprint PCS -19.3 -27.8 -26.8 Unch. -2.9
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*Change from April 26 initial public offering price of $29.50. Source: Bridge
*Change from April 26 initial public offering price of $29.50. Source: Bridge
