MCI Widely Seen as Target Of Next Round of Courtship

By KEN BELSON

Published: January 29, 2005

It is perhaps the worst-kept secret in the $250 billion telecommunications industry: AT&T and MCI have been trying to sell themselves for years.

Now that SBC Communications appears close to buying AT&T, the other Bell operating companies -- Verizon Communications, BellSouth and Qwest -- are forced to consider whether to make a competing bid, try to snatch MCI or stand pat.

Most analysts expect the other Bells to pursue MCI rather than wage a bidding war for AT&T. The last alternative -- expanding without making acquisitions -- means risking falling behind in the race to acquire more corporate customers for phone and data services.

But is MCI a worthy second prize to AT&T?

Despite its woes, MCI has plenty going for it. It emerged from bankruptcy in April 2004 with less debt relative to AT&T and has $5.6 billion in cash on its balance sheet. The chief executive, Michael D. Capellas, has cut thousands of jobs, retreated from the consumer phone market and introduced software services to complement its extensive data network.

MCI is also relatively cheap, with a market capitalization of just $6.5 billion, less than half of AT&T's.

Yet industry experts say MCI operationally is less impressive than AT&T. The company's share of the corporate phone and data market is roughly half of AT&T's, and is considered by industry analysts to be less efficient than AT&T.

According to Michael Rollins, an analyst at Smith Barney, each MCI employee generates $425,000 in annual revenue, nearly 30 percent less than an AT&T worker. Its profit margins after deducting access charges paid to the Bells and others are 8 percentage points lower than AT&T's. The company also invests less on its network and operations.

Investors, betting that MCI is a probable target, have bid up the company's stock 5.5 percent since Thursday, when news of the SBC-AT&T talks first appeared. Shares of MCI rose 37 cents, to close at $19.68 yesterday. If SBC succeeds in buying AT&T, the remaining Bells will probably scramble for MCI, analysts say.

''If I were to compare AT&T and MCI, AT&T is more valuable,'' said Raul Katz, the chief executive of Adventis, a telecommunications consultant in Boston. ''But there's a herd mentality. The Bells are playing musical chairs and fear being left out.''

As a consequence, Mr. Katz, like other industry experts, expects MCI to be acquired soon after AT&T is bought, whenever that might be.

The interest in MCI is a boon to its Mr. Capellas, who was brought in as chief executive to take the company out of bankruptcy and turn it around. Industry analysts give him high marks for cutting costs. He also began an aggressive sales effort to keep the company's biggest customers while it was operating under bankruptcy protection, which it exited in April last year.

But like AT&T, the company's sales are being eroded by Internet technology, which is making it far cheaper to sell phone and data services. MCI's sales, like AT&T's, have been falling by double-digit percentages for several years, and few analysts expect improvement this year or next.

AT&T's brand emerged from the downturn in the telecommunications industry relatively unscathed. MCI, meanwhile, has suffered the stigma of having been connected to its former owner, WorldCom, which collapsed after an $11 billion accounting fraud was unearthed there.

''It's not clear there's any secret sauce to MCI, and you have to admit'' that the brand is tarnished, said John Hanson, a telecommunications consultant at Mercer Management Consulting.

Still, Mr. Hanson and others say that the opportunity to take over MCI's network, large customer list and international connections may be irresistible for one of the Bells.