Telecom giant WorldCom Inc. (www.wcom.com) has pulled its wallet out yet again. This time by signing a $6 billion agreement to acquire Tampa, Fla.-based ICP Intermedia Communications Inc. (www.intermedia.com). Although Intermedia is one of the most well-established CLECs and boasts one of the nation's largest frame relay networks, its Digex Inc. subsidiary was the main attraction for WorldCom in seeking to buy Intermedia.
The proposed deal, which is subject to regulatory and shareholder approvals, gives WorldCom a 55 percent interest in Intermedia's Digex Inc. (www.digex.com), a leading provider of managed web and application hosting services. Under terms of the agreement, each share of Intermedia common stock will be exchanged for $39 of WorldCom common stock. Through its acquisition of Intermedia, WorldCom will own approximately 55 percent of Digex's equity interest and 94 percent of Digex's voting interest. Digex will remain a separate, publicly held company.
The boards of directors of Digex, Intermedia and WorldCom approved the transaction at meetings Sept. 1.
The managed web hosting arena is a targeted revenue stream for WorldCom, according to president and CEO Bernard J. Ebbers. During press conferences today, Ebbers said that managed hosting is expected to produce a $17 billion revenue stream industrywide by 2004, up substantially from today's roughly $2.5 billion to $3 billion revenue stream.
Acquiring a controlling interest of Digex is the "fastest, most advantageous way for us to get there," Ebbers said. WorldCom already owns UUNet (www.uunet.net), which some analysts say has seen its chunk of the pie get smaller as newer companies such as Digex got in on the Internet backbone game.
"With this merger," Ebbers said, "WorldCom accelerates by 12 to 18 months our ability to provide world-class managed web and application hosting services -- one of the highest growth markets in the industry. This merger will strengthen both Digex and WorldCom by creating premier web hosting products and services that our customers are demanding."
He said WorldCom and Digex will offer a suite of access, transport, and applications solutions to customers around the globe.
"As voice communications revenue decreases for carriers, carriers will make their money from the largest enterprises and the biggest part of their bill may be the cost associated with web hosting and all that is the web," says Robert Rosenberg, president of the Insight Research Corp., (www.insight-corp.com), a telecom market research and strategic analysis firm.
And the web is where everyone wants to be if they can afford it.
In July Intermedia said second-quarter earnings were less than expected and the CLEC hired Bear, Stearns & Co. (www.bear.com) to explore options, including the sale of Digex. The unit was draining Intermedia's cash flow, analysts said at the time, keeping Intermedia's stock from realizing its true value.
But Ebbers said that instead of just buying Digex outright, WorldCom sought Intermedia in its entirety because it's an opportunity to have all of Intermedia's significant assets. This, in addition to Digex, include Intermedia's standing as a notable frame relay provider; a top five systems integration provider; a leading ISP; and a large multi-tenant services provider.
WorldCom already operates in eight of Intermedia's 14 local markets. Both companies plan to evaluate such network overlaps further to appease any possible regulatory concerns. On the back of international regulators squashing WorldCom's proposed merger with Sprint Corp. (www.sprint.com), Ebbers says he sees no reason why regulators wouldn't go for the WorldCom/Intermedia deal.
The merger is subject to the approvals of the U.S. Department of Justice (www.usdoj.gov), the Federal Communications Commission (www.fcc.gov) and various other governmental authorities. The companies expect the merger to close early in 2001.
