Company Perspectives:

MCI WorldCom is a new kind of communications company. With revenue of

more than $30 billion, MCI WorldCom combines financial strength and a

depth of resources to pursue the industry's best growth opportunities with

an advanced global network built for the data-intensive era of

communications.

History of MCI WorldCom, Inc.

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MCI WorldCom, Inc. is one of the largest telecommunications companies in

the world. Formed on September 15, 1998, from the $37 billion merger of

MCI Communications Corporation and WorldCom, Inc., the company's

operations are organized around three divisions: MCI WorldCom, U.S.

telecommunications; UUNET WorldCom, Internet and technology services;

and WorldCom International. The MCI WorldCom division is the second

largest long distance company in the United States (after AT&T), with a

45,000-mile nationwide fiber optic network, that provides local phone

service in more than 100 markets and offers data, Internet, and other

communications services. UUNET WorldCom maintains a highly reliable

backbone network that provides local access to the Internet from more than

1,000 locations in the United States, Canada, Europe, and the Asia-Pacific

region, in addition to a wide range of other Internet services. WorldCom

International is a local, facilities-based competitor in 15 countries outside

the United States, connecting to the company's overall global network more

than 5,000 buildings in Australia, Belgium, Brazil, France, Ireland,

Germany, Hong Kong, Italy, Japan, Mexico, The Netherlands, Singapore,

Switzerland, Sweden, and the United Kingdom.

Before the 1998 merger MCI Communications, founded in 1968, was well

known as the company that led the charge in introducing competition in the

telecommunications industry and precipitated the breakup of AT&T's Bell

System. Following the breakup, MCI quickly became a multibillion-dollar

global enterprise. WorldCom began as a reseller of long distance services in

1983 before emerging as the fourth largest long distance provider and a

full-service telecommunications powerhouse in the mid-1990s. WorldCom's

growth was aided by a series of major acquisitions, including Resurgens

Communications Group, Inc. and Metromedia Communications Corporation

(1993); IDB Communications Group, Inc. (1994); WilTel Network Services

(1995); MFS Communications Company, Inc. and UUNET Technologies, Inc.

(1996); and Brooks Fiber Properties, Inc., CompuServe Corporation's data

network, and America Online Inc.'s network services subsidiary (all in

1998).

MCI's History Began with 1963 FCC Application

Founded in 1968 as Microwave Communications, Inc. (MCI) by John

Goeken, owner of a mobile radio business, MCI's regulatory history began

in 1963, when Goeken filed an application with the Federal Communications

Commission (FCC) for permission to construct a private line microwave

radio system between Chicago and St. Louis, Missouri. Goeken proposed to

erect a series of microwave towers between the two cities that would carry

calls on a microwave beam. AT&T actually had developed the technology

and used microwaves on many of its long distance routes. Unlike the Bell

System, which had to expend enormous sums to maintain and operate the

basic wire-and-cable network, however, Goeken proposed to offer a much

cheaper alternative by employing microwave technology exclusively. As

Fortune, April 1970, noted, Goeken contended that he would provide a

service not offered by any of the existing telephone companies: "... wider

choice of bandwidths, greater speed, greater flexibility ... and prices as

much as 94 percent cheaper than A.T.&T.'s." In addition to carrying voice

transmissions, the company stated that its greatest appeal would be to

those who wanted to send data or a combination of data and voice

messages.

Goeken's application set the stage for one of the great corporate battles in

U.S. history by challenging the prevailing public service principle that had

been developed and applied to telephony during the 19th and 20th

centuries. The public service principle derived from the philosophy that

universal availability of telephone service could be achieved only through

one independent and interconnecting network. It was believed by those who

built the system and those who came to regulate it that the communications

industry was a natural monopoly, in which quality and service were best

achieved through one integrated system rather than through the play of

competing interests. At the time when Goeken filed his application, AT&T

saw him as a small but important threat to its position as the nation's basic

provider of phone services.

In 1964 several corporations, including AT&T, its Illinois Bell subsidiary,

Western Union, and GTE's Illinois-based subsidiary, petitioned the FCC to

deny Goeken's application. The corporations argued that Goeken's proposed

service would be redundant. More important, AT&T charged that Goeken's

service would skim the most profitable segment of the communications

market at the expense of universal service provided by Bell. AT&T

depended on charging high rates for some of its intercity services--such as

private line, WATS, and regular long distance&mdashø subsidize the vast

expense of constructing and maintaining the nation's communications

network. AT&T also used the revenue derived from these services to

subsidize the price of local service, making the cost of basic phone service

affordable to the average customer. If Goeken and others were allowed to

compete openly in the market, this delicate system of rate averaging would

be disrupted. Although it was in the interest of AT&T and the others to stall

proceedings as long as possible in the hope that Goeken would not pursue

his plan, most of the delays stemmed from Goeken himself. Filing

deficiencies caused endless delays.

The seeds of change in the regulatory climate were sown in the revolution

of new technologies that arose during and after World War II. Rapid

technological advances in the fields of microwave relay, satellites,

computers, and coaxial cable, in addition to other technologies such as

mobile radio, recording devices, and answering machines, gave rise to a

number of small, aggressive firms seeking to enter the telecommunications

field. As these firms, armed with the new technologies, demanded

increasingly more access to the telecommunications market, the FCC was

compelled to respond. In a string of rulings, the FCC first in 1956 decided

that under certain conditions non-Bell terminal equipment could be

attached to the Bell System network. In 1959 the FCC permitted firms to

operate private microwave communications systems for internal use.

With these two decisions, the FCC paved the way for entry of competitive

firms into certain markets. The FCC completely opened the terminal

equipment market in 1968. Almost immediately dozens of small firms

entered the market seeking to sell equipment in competition with Bell

products.

In this changing regulatory climate of the early 1960s, Goeken arrived on

the scene proposing a supplemental service that he claimed was not being

provided by any company. Goeken claimed that he was seeking only a

peripheral submarket much too small to disrupt AT&T's system of rate

averaging. AT&T, however, opposed the entry, claiming that the ostensibly

new and innovative service was merely a variation of a service already

offered.

McGowan Arrived at MCI in 1968

In 1968, as the FCC was considering the newly incorporated MCI's

application, the fortunes of the small company took a dramatic turn when

William McGowan joined the company as chairman and chief executive

officer. McGowan saw promise in the company, put his money behind it, and

soon devised a strategy that would lead MCI to phenomenal success. When

McGowan joined the firm, MCI's major asset was a five-year-old application

to provide point-to-point private-line service by microwave between Chicago

and St. Louis.

Almost immediately, McGowan set up a new company, Microwave

Communications of America, to attract private investors to finance MCI-

affiliated companies around the country. At the same time the company

announced plans for an 11,000-mile system that would run through 40

states and be operated by 16 affiliates. Most important, McGowan began to

orchestrate a legal-political strategy that would serve MCI extraordinarily

well in later years when the company lobbied the FCC and Congress to

grant its license.

On August 13, 1969, in a four-to-three decision, the FCC authorized MCI's

Chicago-St. Louis application. The decision also assured MCI that it could

interconnect with the Bell System network to enable MCI to provide its

proposed services. Instead of settling the AT&T-MCI dispute, however, the

FCC's MCI decision set the stage for a major battle over

telecommunications policy as a result of the commission's failure to

delineate clearly the boundaries of competition. The market threatened by

MCI's entry was considerably larger than the market opened by the FCC's

1959 decision, which had allowed individual firms to set up their own in-

house microwave communications systems. AT&T repeatedly charged that

MCI would not be providing any new technologies or services but only

would be skimming the most profitable routes, which AT&T needed to

support unprofitable rural routes and basic local phone service.

It was clear to McGowan that to build MCI into a major national

telecommunications network, AT&T's monopoly would have to be

dismantled. McGowan launched a three-pronged offensive, lobbying

Congress, the FCC, and the courts. The company hired Kenneth Cox in 1971

as a senior vice-president who was assigned to lobby the FCC. Cox was a

former FCC commissioner who had voted for approval of MCI's application

in 1969.

AT&T responded aggressively to the FCC's MCI decision and was joined by

Western Union and GTE in petitioning the FCC to reconsider MCI's

application. Since other firms were then seeking entry to provide similar

microwave private-line services, the companies argued that MCI could no

longer be considered an isolated experiment and that increased competition

would lead to higher prices, interfere with universal service, and undermine

the basic system of rate averaging. MCI countered that these concerns were

unfounded. The FCC denied the petitions, and in 1971 MCI received final

approval to build its Chicago-St. Louis route.

Ultimately the 1971 FCC decision led to open entry into the private-line

market. The FCC's 1971 deregulatory move, however, was narrow in scope

and intent, designed to open only a specialized segment of the market. It

was not the initial intention of the FCC to encourage full-scale competition

with AT&T. The goal was to allow other firms to provide services not

available from AT&T.

Verged on Collapse in Early 1970s

On June 22, 1972, MCI issued public stock, raising more than $100 million,

and, assisted by a $72 million line of bank credit, it began construction of

the Chicago-St. Louis route. The company also laid plans for its national

microwave network that would run from coast to coast. MCI soon ran into

trouble with AT&T, however, over the issue of interconnection with Bell's

basic phone network. The FCC ruling had assured MCI that it could use

Bell's local phone network to provide its service, but it did not stipulate at

what cost or how quickly AT&T should install MCI's lines. At the same time

AT&T announced that it was instituting a new pricing system called HI/LOW

to compete directly with MCI and others on private line routes. By 1973

MCI was in financial trouble. Just months away from opening its nationwide

microwave network, the company defaulted on its line of bank credit and

was on the verge of collapse. Also in 1973 Microwave Communications, Inc.

reorganized as MCI Communications Corporation.

Because the FCC's rulings--especially the decision on MCI--had spawned

such competition, the commission had a political stake in MCI's success.

McGowan understood the FCC's commitment to the survival of competition.

To ensure MCI's preservation he worked quickly to enter the more

profitable markets, capitalizing on the FCC's support. In the fall of 1973,

McGowan, badly in need of cash, urged the FCC to authorize MCI to

enlarge its services to include FX lines. Such lines connect a single

customer in one city to another city, in which any number can be reached.

The service, however, required the use of Bell's switched network, which

AT&T saw as a violation of the intent of previous FCC rulings. In the

protracted legal battle that ensued, MCI won a major victory that served as

a prelude to the company becoming a full-scale long distance competitor of

AT&T.

In 1973 MCI also began lobbying the antitrust division of the Justice

Department to file a suit against AT&T to break apart the Bell System. On

March 6, 1974, MCI filed a civil antitrust suit of its own, seeking damages

from AT&T. Shortly thereafter, the Justice Department filed an antitrust

case against AT&T to break up the Bell System.

Execunet Saved MCI, Led to Long Distance Competition in the Late

1970s

Even though MCI had succeeded in enlarging its markets by winning

approval to provide FX services, the company had yet to make a profit.

Between March 1973 and March 1975, the company lost working capital at

the rate of $1 million a month. It needed new markets and, in a risky

gamble, began to offer Execunet, a service nearly identical to AT&T's

regular, very profitable long distance service. If the company was successful

it could become a wealthy corporation, but if it failed, MCI faced the

possibility of bankruptcy.

In 1975 V. Orville Wright joined MCI. Wright soon became president. Also

in 1975, AT&T protested to the FCC that by providing Execunet, MCI had

flagrantly exceeded its mandate. The FCC concurred, and MCI was directed

to cease providing Execunet service. MCI won an appeal, and in 1978 the

Supreme Court refused to review the appeal court's ruling that overturned

the FCC ban on Execunet and ordered Bell to offer interconnection service

to MCI. The breakthrough Execunet victory saved MCI from possible

financial collapse. The company, in opposition to both AT&T and the FCC,

had won the right to provide long distance service. In effect, MCI had

cracked the Bell System monopoly. MCI soon began offering its long

distance service to residential as well as business customers; in March 1980

MCI became the first AT&T competitor in the residential market when it

launched residential service in Denver. As a full-scale competitor in the

lucrative long distance market, MCI saw its revenues increase sharply. By

1981 MCI's annual revenues approached $1 billion. The Execunet victory

also opened the long distance market to other small firms. Few, however,

could afford to expend the enormous sums needed to build and maintain

their own network facilities.

1984 Bell System Breakup Led to Difficulties

By the early 1980s it was clear that the government was winning its

antitrust suit against AT&T. On January 8, 1982, the Justice Department

and AT&T announced agreement in the seven-year-old case, providing for

the divestiture of the 22 wholly owned local Bell operating companies.

MCI's successful crusade for deregulation and divestiture, however, placed

the company under financial strain in the immediate aftermath of the Bell

System's breakup in 1984. AT&T, responding to the competitive inroads

made by MCI and others, began reducing its rates drastically. MCI's profit

margins collapsed as it was compelled to reduce rates. Higher access

charges also squeezed the company. In 1985 MCI's stock plunged from

more than $20 per share to under $7 per share, and in 1986 the company,

despite having the second largest share of the long distance market, posted

a loss of $448.4 million. From the beginning, MCI's profits derived not from

superior technology or innovative processes, but from its cost advantage

over AT&T, which it passed on to customers. Once the local Bell operating

companies were divested, MCI's artificial cost advantage disappeared.

In 1985 MCI was awarded a disappointing $113.3 million in its civil

antitrust suit against AT&T. Also in 1985, in need of capital to expand MCI's

national network and to finance an aggressive marketing campaign to win

new long distance customers, McGowan struck a deal with IBM, which

bought 18 percent of MCI for cash with the option to expand its holdings

later up to 30 percent.

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McGowan continued to argue the need to regulate AT&T for several years

before open competition could be considered viable. Whereas McGowan had

led the charge for deregulation throughout the 1970s, he now argued that

only vigorous regulation could guarantee that MCI and other competitors

would be able to compete effectively with AT&T. The following year, MCI

called for the removal of all remaining regulatory restraints. The odd

alliance was created by the companies' shared perception that deregulation

would enable both to improve their financial outlook by increasing rates.

The two companies also had a shared interest in opposing proposals

advanced by the FCC and the Justice Department to relax regulation of the

former Bell operating companies, which had become competitors of MCI

and AT&T.

MCI was involved early on in what would later be dubbed the Internet. In

September 1983 the company launched MCI Mail, a new nationwide e-mail

system. Five years later the National Science Foundation Network

(NSFNet) was launched; constructed by MCI, this ultra-high-speed digital

network linked a number of academic computer centers and became the

"backbone" of the Internet. Meantime, in 1985 V. Orville Wright retired as

president of MCI, but continued to serve as vice-chairman until 1990. He

was replaced as president by Bert C. Roberts Jr.

By the early 1990s MCI had weathered the wake of AT&T's divestiture and

had expanded rapidly into providing a wide range of domestic and

international voice and data communications services. The company's

communications services included domestic and international long distance

telephone service, international record communications services between

the United States and more than 200 countries, and a domestic and

international time-sensitive electronic mail service. Long distance telephone

service accounted for 90 percent of MCI's total revenues in 1989. The

company had bolstered its position in domestic and international markets

through a series of investments, including acquisition of Satellite Business

Systems, RCA Global Communications, Inc., and certain assets and

contracts of Western Union's Advanced Transmission Systems division. In

1990 MCI also purchased a 25 percent interest in INFONET Services

Corporation, a provider of international data services, and acquired for

$1.25 billion Telecom*USA, then the nation's fourth largest long distance

company. With the acquisitions, MCI had approximately a 16 percent share

of the domestic long distance market.

MCI's Friends & Family Program Launched in 1991

In March 1991 the company announced that it had acquired Overseas

Telecommunications, Inc., provider of international digital satellite services

to 27 countries worldwide. That same month, one of the key events in later

company history occurred--the launching of the Friends & Family marketing

program, which offered 20 percent discounts to groups of MCI customers

with members who phone each other. AT&T had been finding success

winning back MCI customers through follow-up calls and an aggressive

advertising blitz. Consequently, in the second half of 1990 MCI market

share dropped to 13 percent. Friends & Family helped MCI attract seven

million new customers, pushing its market share to 20 percent by the end of

1993.

In December 1991, the same month that MCI completed the conversion of

its entire nationwide network from analog to digital transmission, president

and COO Roberts was named to the additional post of CEO, with McGowan

remaining chairman. McGowan, a heart transplant recipient in 1987, died of

a heart attack the following June, at the age of 64. Roberts was named to

succeed him as chairman, retaining the CEO post as well.

MCI Diversified Under Roberts in the Mid-1990s

While the company focused almost exclusively on the long distance market

when McGowan was in charge, MCI under Roberts's leadership began

diversifying in anticipation of both the further deregulation of the U.S.

telecommunications market and the predicted convergence of

telecommunications, computers, and entertainment. In September 1992

MCI entered into an alliance with Canadian long distance firm Stentor to

create the first fully integrated digital network linking the United States

and Canada. MCI introduced 1-800-COLLECT in May 1993, the first collect

calling service of its kind.

In June 1993 MCI and British Telecommunications plc (BT) announced that

they would form a worldwide alliance to provide advanced global network

services. Following regulatory approval in mid-1994, BT purchased a 20

percent stake in MCI for $4.3 billion. MCI and BT set up a joint venture

called Concert Communications Company, which was 75 percent owned by

BT and 25 percent owned by MCI. Concert offered worldwide voice and

data services to multinational corporations.

In January 1994 MCI formed MCImetro, entered the long distance market in

Mexico, and unveiled networkMCI. Through MCImetro MCI planned to

build a $2 billion fiber optic phone network, bypassing local phone

companies and offering alternative local service. By 1995 the company had

received regulatory approval as a competitive local carrier in 15 states. The

Telecommunications Act of 1996 (signed into law in February 1996) opened

up competition even more, allowing local phone and long distance

companies to compete in each other's markets and providing additional

opportunities for MCImetro. In Mexico, MCI formed an alliance with

banking group Grupo Financiero Banamex-Accival (Banacci) to form

Avantel, a joint venture to provide competitive long distance service in

Mexico. In September 1995 Avantel began construction of Mexico's first all-

digital fiber optic network. After completion of the 3,400-mile network,

Avantel in August 1996 became the first company to provide alternative

long distance service in Mexico. By July 1997 the new venture had captured

about ten percent of the $4 billion long distance market in that country.

NetworkMCI, meantime, was a software package aimed at small and

medium-sized businesses that bundled e-mail, fax, paging, document

sharing, Internet access, and videoconferencing.

MCI invested $1 billion for a ten percent stake in The News Corporation

Limited in August 1995. The two companies subsequently announced that

they would develop a direct broadcast satellite (DBS) system in the United

States, purchasing one of only three DBS licenses in 1996. News

Corporation and MCI then set up American Sky Broadcasting (ASkyB), a

joint venture aiming to provide digital satellite services to homes and

businesses by late 1997.

In September 1995 MCI entered the cellular phone market by paying about

$210 million for Nationwide Cellular Service, Inc., the largest independent

reseller of cellular services. Over the next few months MCI expanded

Nationwide through additional contracts to resell service, so that the

company was able to offer service to 75 percent of the U.S. population by

early 1996. MCI thereby had quickly gained a significant presence in this

fast-growing telecom sector without having to invest billions of dollars

developing a wireless infrastructure. In November 1995 MCI paid $1.13

billion to acquire Canadian firm SHL Systemhouse Inc., a leading systems

integration and outsourcing company, providing information technology

services to commercial and governmental enterprises. The following April

MCI introduced MCI One, a service providing consumers and small business

owners a single source for a full range of communications needs, including

long distance, cellular, paging, Internet access and e-mail, calling card, and

a personal "One Number" with intelligent routing.

During 1996 Gerald H. Taylor was named CEO, with Roberts retaining the

chairmanship. That November MCI and BT entered into a $24 million

merger agreement to create a global communications power called Concert

plc. As the merger moved through the process of clearing regulatory

hurdles on both sides of the Atlantic, MCI announced in July 1997 that its

start-up local telephone operation would lose nearly $800 million in 1997,

about twice what BT had expected. BT, concluding that MCI was worth less

than it originally thought, forced MCI to renegotiate the merger agreement.

The companies announced in August that BT would pay $19 million to

acquire the 80 percent of MCI it did not already own, a 22 percent

reduction from the previous deal. This opened the door, however, to other,

unsolicited bidders. WorldCom came forward on October 1 with a $30

billion stock swap bid for MCI, a company more than three times its size.

Two weeks later, GTE Corporation stepped into the fray with an all-cash

offer of $28 billion. On November 10 MCI accepted a sweetened takeover

offer from WorldCom, amounting to a $37 billion stock swap.

WorldCom Began as LDDS in 1983

WorldCom's history began with that of Long Distance Discount Services,

Inc. (LDDS), which was formed in 1983 in Hattiesburg, Mississippi, when

the breakup of AT&T enabled thousands of competitors to start reselling

long distance telephone service to individual and business customers. Bill

Fields convinced several investors to lease a local Bell System Wide-Area

Telecommunications Service (WATS) line and resell time on the line to

businesses. Long distance resellers like LDDS bought time from regional

Bell companies in volume and sold it, often at a discount, to business

customers. LDDS owned the switches, or nodes, of its network and leased

the lines from local providers. The sophisticated long distance technology

was designed to handle a high volume of calls. Some observers compared

the long distance telephone industry with the airline industry: there was a

fixed cost for getting calls or seats from one place to another, and the more

customers a telecommunications company or airline had, the lower its costs

would be. Price competition among these companies was ruthless.

Assuming that the "Baby Bells" would continue to lease the lines at a fixed

rate, Fields signed up 200 customers. But when Bell started raising the

charges for the use of the lines, LDDS began to lose money.

By the early months of 1985 the fledgling business was losing $25,000 each

month. It became clear to Fields that he was failing at the day-to-day

management of LDDS, and he first tried to sell the company. Later in 1985

several owners signed LDDS over to Bernard Ebbers, one of the initial

investors. By the time Ebbers became president and chief executive officer,

LDDS was $1.5 million in debt.

Ebbers was a Canadian who came to the United States on a basketball

scholarship to Mississippi College. After graduation he became a high

school baseball coach. He later worked in the garment trade as a

distributor, but lost interest in the low-margin industry. Ebbers seized the

chance to buy a 40-room motel in Columbia, Mississippi, in the 1970s,

borrowing the necessary money to establish himself in the business. In the

real estate market of the late 1970s, the value of prime properties could

double over the course of five years. Ebbers parlayed his one hotel into 12

by the early 1980s, garnering healthy operating and asset gains.

As head of LDDS, Ebbers worked to control costs. He kept overhead low

with lean operations and unpretentious offices. The streamlined LDDS

brought on new clients with a claim of customer service that larger long

distance companies could not offer. LDDS did not use telemarketing to

solicit new business, but mobilized a direct sales force to make personal

contacts. After the initial face-to-face solicitation, LDDS made monthly, and

sometimes weekly, office calls to ensure that the customers' service was

satisfactory. The company provided an alternative to the major long

distance carriers' across-the-board packages by tailoring service to each

customer's calling patterns, which simultaneously maximized routing

efficiency and cut costs. The major long distance carriers at this time also

were exerting a great deal of effort to secure big-ticket clients; LDDS was

able to take advantage of this by concentrating on small business customers

who were falling through the cracks.

LDDS Grew Rapidly Through Acquisition in the Late 1980s and Early

1990s

Within six months of Ebbers's move into the driver's seat, the company had

moved into the black. In 1986 revenue rose to $8.6 million, and a year later

sales had grown to $18 million. By 1988 annual revenues had skyrocketed

to $95 million. Consolidation and acquisitions were the principal factors

that enabled LDDS to accomplish this rapid growth during the last five

years of the 1980s. The company leveraged its order to buy other third-tier

long distance companies, including: Telesphere Network, Inc. (1987); Com-

Link 21, Inc. of Tennessee (1988); Telephone Management Corporation

(1988); Inter-Comm Telephone, Inc. (1989); ClayDesta Communications of

Texas (1989); Microtel, Inc. (1989); and Galesi Telecommunications of

Florida (1989). The acquisitions cost the company a total of about $35

million, but expanded LDDS's geographic network to include Missouri,

Tennessee, Arkansas, Indiana, Kansas, Kentucky, Texas, Alabama, and

Florida.

Each company over which LDDS assumed control performed better after

acquisition. Part of the success was attributed to the LDDS standards of

customer service, but the economies of scale gained when more companies

came on line also brought higher profitability. LDDS applied its customer

service ideals to new acquisitions through a decentralized system wherein

each state office set its own sales goals. Companies in the system

formulated their own marketing strategies in response to local market

conditions.

LDDS's annual earnings grew from $641,000 in 1986 to more than $4.5

million in 1989. That same year the company merged with 17-year-old,

Nashville-based, Advantage Company, a public company that was losing

money when the two consolidated. The merger benefited both companies--it

enabled LDDS to reduce its debt and finance future purchases through

stock offers, and it brought Advantage into profitability. LDDS was now a

public company, incorporated under the name LDDS Communications, Inc.

By the end of 1989, LDDS's revenue-per-employee stood at $360,000, more

than double the industry average, and triple that of some of LDDS's higher-

priced competitors. LDDS also pursued other avenues to spur growth. Its 14

percent annual internal growth rate was fueled by thorough infiltration of

its growing markets.

Despite the economic downturn of the early 1990s, LDDS continued its

upward climb. The long distance telephone business was not adversely

affected by the economic climate, as the telephone had long since

established itself as an indispensable part of the business world. In fact,

LDDS made two acquisitions that year, purchasing Mercury, Inc. for $10.3

million and Tele-Marketing Corporation of Louisiana for $15.5 million.

Despite the recession, LDDS's 1990 profit was $9.8 million, ten times its

1986 total. Sales had grown sixteenfold in that same time span.

LDDS made three acquisitions in 1991, using cash, stock, and bank debt to

finance purchases that totaled $90 million. National Telecommunications of

Austin was purchased with a combination of $27 million in cash and stock.

The acquisition of Phone America of Carolina established an LDDS presence

in North and South Carolina and eastern Tennessee. These two companies

had combined annual revenues of $51 million. LDDS also made its largest

acquisition up to that time with the purchase of Mid-American

Communications Corporation. Mid-American provided long distance service

to Nebraska, Missouri, Kansas, Illinois, Wisconsin, North Dakota,

Minnesota, Colorado, New Mexico, and Arizona. The acquisitions enabled

LDDS to increase its sales by 71 percent over 1990 to $263.41 million.

Between 1983 and 1991, LDDS spent more than $200 million to purchase

about 24 smaller companies. The additions brought the LDDS network to 27

states, a system that excluded only the Northeast and Northwest. The

downside of all of this growth was that it left the company with $165 million

in long-term debt, as well as a negative net worth.

At about the same time, AT&T started trying aggressively to win back

customers of all sizes. Despite its dramatic success, LDDS and other third-

tier long distance companies had captured about one percent only of the

total long distance market at this point. In the 1990s the big three

telecommunications companies aimed for the small- and medium-sized

businesses they had previously neglected.

LDDS Became Fourth Largest Long Distance Company in 1992

LDDS did not stand idly by, however. In 1992 LDDS acquired Shared Use

Network Systems, Inc.; Automated Communications, Inc.; Prime

Telecommunications Corporation; TFN Group Communications, Inc.; and

Telemarketing Investments, Ltd. These companies, combined, expanded

LDDS service in Arizona, Florida, Iowa, Nebraska, Nevada, New Mexico,

New York, Ohio, Utah, Virginia, and West Virginia. The new affiliates filled

in LDDS's service network and brought a total of $66 million in annual

revenues.

But a much more important development for the company in 1992 was its

merger with Advanced Telecommunications Corporation (ATC). The Atlanta-

based company had $350 million in annual sales spread over a network of

26 southern states. The merger increased LDDS's annual revenues by 30

percent to $801 million in 1992. Although merger-related expenses caused

LDDS to take a loss of $8 million for the year, the company expected to

realize significant cost savings, increased opportunities for acquisitions, and

a wider variety of products with the consolidation. Cost savings were

achieved through LDDS's ever-enlarging networks, which produced a

situation in which a larger percentage of the company's calls originated and

terminated within its service area. Therefore, more calls stayed on the

network of low-cost transmission facilities that were owned or leased by

LDDS. Of course, increased volume lowered the per-minute costs. LDDS's

acquisition of ATC also made the consolidated company the fourth largest

long distance provider in the United States (behind AT&T, MCI, and Sprint).

In March 1993 LDDS acquired Dial-Net Inc., which had operations spread

throughout half of the United States. Two months later, the company moved

into a new headquarters in Jackson, Mississippi. LDDS had dodged rumors

and predictions of imminent takeover almost since its inception; in an effort

to put to rest such speculation, in September 1993 the company merged

with Metromedia Communications Corporation (MCC) of East Rutherford,

New Jersey, and Resurgens Communications Group, Inc. of Atlanta.

Through the three-way transaction, valued at $1.2 billion, LDDS

shareholders collected about 68.5 percent of the fully diluted equity of the

combined company, while MCC and Resurgens shareholders secured the

remainder. LDDS issued 19 million new common shares in conjunction with

the merger and made a private placement of $50 million in convertible

preferred stock. The merger extended LDDS's network to include all 48

mainland states, with MCC's strength in the northeast and Resurgens's

strength in California of particular importance. The new entity was renamed

LDDS Communications, Inc.; John Kluge, who had been chairman of MCC,

became chairman of LDDS Communications, and Ebbers was named CEO.

Diversified LDDS Emerged as WorldCom in 1995

LDDS Communications dramatically broadened its telecommunications

offerings in the mid-1990s through a series of significant acquisitions. In

December 1994 the company acquired Culver City, California-based IDB

Communications Group, Inc. in a $900 million stock deal that greatly

expanded its international capabilities. Gained through the purchase were

gateways to 65 countries, voice and data networks, undersea cables, and

international earth stations and satellites. The next month LDDS completed

the acquisition of WilTel Network Services for $2.5 billion in cash from The

Williams Companies, a pipeline company. Williams had created an 11,000-

mile fiber optic cable network, much of it snaked through unused oil and

gas pipelines. It was one of only four national networks in the United States.

LDDS had quickly moved from being a leaser of a larger rival's phone lines

to having one of the most sophisticated U.S. networks, as well as

international gateways and networks. With its eye on becoming a global

leader in telecommunications, the company changed its name to WorldCom,

Inc. in May 1995. Basketball superstar Michael Jordan started a stint as a

corporate spokesperson for the company in December of that year. For the

year, WorldCom recorded revenues of $3.70 billion, a 65 percent increase

over the prior year.

Having added international capabilities and a nationwide network to its

core long distance business, WorldCom next aimed for a piece of the local

communication service market. It was helped in this effort by the February

1996 signing into law of the Telecommunications Act of 1996, which

permitted local and long distance companies to enter each other's markets.

Following the passage of this landmark legislation, WorldCom signed

agreements to become the primary provider of long distance service for

GTE, Ameritech, and SBC Mobile Systems. The company received

permission from state regulators in Connecticut, Florida, Illinois, California,

and Texas to provide local telephone service. In December 1996 WorldCom

acquired MFS Communications Company, Inc. for $14.4 billion in stock.

MFS was a leading provider of alternative local network access facilities--

bypassing the Bell networks--through digital fiber optic cable networks it

had built in and around more than 50 U.S. cities as well as several in

Europe. The addition of MFS made WorldCom the first company to offer

both local and long distance services over its own network in the United

States since the AT&T breakup. MFS also owned a trans-Atlantic fiber optic

link and had just acquired--in August 1996--UUNET Technologies, Inc., the

world's largest Internet service provider (and also the first). MFS Chairman

James Q. Crowe was named chairman of WorldCom following the merger,

UUNET CEO John W. Sidgmore was named vice-chairman, and Ebbers

remained president and CEO. WorldCom revenues reached $4.49 billion in

1996, although the company recorded a net loss of $2.21 billion, reflecting a

$2.14 billion charge related to the acquisition of MFS.

WorldCom could now offer an impressive array of individual services--local,

long distance, Internet, and international&mdash well as "bundled" services

that were particularly attractive to businesses. One area in which it was

clearly lacking was cellular, although in 1996 it had purchased Phoenix,

Arizona-based Choice Cellular, one of the leading cellular resellers in the

United States. But WorldCom was not done dealing. From September

through November 1997 the company announced acquisitions of

CompuServe Corporation, Brooks Fiber Properties, Inc., and MCI.

CompuServe was acquired from H&R Block Inc. in January 1998 for $1.2

billion in stock. WorldCom retained CompuServe's data network but

swapped its consumer online service division for America Online's ANS

network services subsidiary. These network additions significantly bolstered

UUNET's capacity. January 1998 also saw WorldCom complete its $2.9

billion purchase of Brooks Fiber, like MFS a provider of alternative local

access networks in the United States. Brooks Fiber added an additional 34

cities to the 52 markets where WorldCom already offered alternative local

phone services.

MCI WorldCom Created in 1998

For 1997 WorldCom posted revenues of $7.35 billion, a 64 percent increase

over 1996. The combination of WorldCom and MCI, however, was expected

to add up to a company with revenues exceeding $30 billion. The $37 billion

merger (including $7 billion in cash paid by WorldCom to acquire BT's 20

percent stake in MCI), which was consummated on September 15, 1998,

was at the time of its announcement in November 1997 the largest merger

ever, although it soon was eclipsed by other deals in the merger frenzy of

the late 1990s. The resultant MCI WorldCom, Inc. boasted of 22 million

customers, 25 percent of the long distance market in the United States,

some 933,000 miles of fiber for long distance service, local network

facilities in 100 U.S. markets, 508,000 fiber miles for local service, and an

international presence in more than 200 countries. European regulators,

fearful that MCI WorldCom would have too much control of the Internet

backbone, forced MCI to divest all of its Internet assets, and MCI agreed in

July 1998 to sell them to Cable & Wireless PLC for about $1.6 billion in

cash. MCI WorldCom, however, was able to keep WorldCom's prized

UUNET Internet operation. As with other WorldCom takeovers, Ebbers took

the posts of president and CEO of the new entity, and MCI's Roberts was

named chairman.

In March 1998, meanwhile, Telefonica de España S.A. joined with

WorldCom and MCI in business ventures that aimed at expanding MCI

WorldCom's reach in Europe and Latin America. WorldCom in August 1998

sold $6.1 billion in bonds, the largest corporate bond deal in history, raising

funds to help pay for its purchase of MCI. In December 1998 EchoStar

Communications Corp. agreed to buy the satellite television business of

News Corporation and MCI WorldCom (including ASkyB) in a stock

transaction valued at more than $1 billion, with MCI WorldCom slated to be

left with a stake of about seven percent in EchoStar. In August 1998 BT

agreed to buy MCI's 24.9 percent stake in the Concert joint venture for $1

billion, effectively bringing to a close the two companies' partnership. It was

not the end of Concert, however, as BT had in the meantime formed a new

global joint venture with AT&T to provide multinational clients a host of

telecommunications and data services; Concert was melded into this joint

venture. In late September 1998 the newly charged competitive

environment was clearly evident when MCI WorldCom launched its own

bundled service for multinationals, called On-Net. Certainly the

telecommunications wars--which MCI had helped precipitate--were only just

beginning, and MCI WorldCom was certain to be on the front line of nearly

every battle.

Principal Divisions: MCI WorldCom; UUNET WorldCom; WorldCom

International.

Additional Details

Public Company

Incorporated: 1998

Employees: 75,000

Sales: $30 billion (1998 est.)

Stock Exchanges: NASDAQ

Ticker Symbol: WCOM

SICs: 4813 Telephone Communications, Except Radio; 4822

Telegraph & Other Message Communications; 4899 Communication

Services, Not Elsewhere Classified; 7379 Computer Related Services,

Not Elsewhere Classified

Further Reference

Barrett, Amy, and Elstrom, Peter, "Making WorldCom Live Up to Its Name," Business Week, July 14, 1997, pp. 65--66."Bernie Ebbers Saved the Company," Mississippi Business Journal, November 1989, p. 316.Cantelon, Philip L., The History of MCI: 1968--1988, the Early Years, Dallas: Heritage Press, 1993.Coll, Steve, The Deal of the Century: The Breakup of AT&T, New York: Atheneum, 1986.Donlon, J.P., "Convergence Calling," Chief Executive, May 1996, pp. 32--36.Elstrom, Peter, "The Axman Cometh?: WorldCom's Pattern: Shopping, Then Chopping," Business Week, October 20, 1997, pp. 36--37.Elstrom, Peter, and others, "The New World Order," Business Week, October 13, 1997, pp. 26--30, 32--33.Epstein, Joseph, "Private-Label Long Distance," Financial World, April 22, 1996, pp. 52--54, 56.Faulhaber, Gerald R., Telecommunications in Turmoil: Technology and Public Policy, Cambridge: Ballinger Publishing, 1987.Frank, Robert, and Holden, Benjamin A., "LDDS Agrees To Acquire IDB in Stock Swap," Wall Street Journal, August 2, 1994, p. A3.Gianturco, Michael, "Telephone Numbers," Forbes, June 22, 1992, p. 108.Jones, Kevin D., "LDDS: From Zero to $150 Million in Six Years, But Analysts Say It's a Takeover Target," Mississippi Business Journal, November 1989, pp. 26--30.Kahaner, Larry, On the Line: The Men of MCI--Who Took On AT&T, Risked Everything and

Won, New York: Warner Books, 1986.Keller, John J., and Lipin, Steven, "The Battle for MCI Takes Another Twist: Now, It's GTE's Turn," Wall Street Journal, October 16, 1997, pp. A1, A10.------, "WorldCom, MCI Deal Could Rewrite Script for a New Phone Era," Wall Street Journal, November 11, 1997, pp. A1, A6.Keller, John J., and Naik, Gautum, "Merger Poses a Bold Challenge to Bells: WorldCom, MFS Confirm $12.4 Billion Accord," Wall Street Journal, August 27, 1996, p. A3.Kupfer, Andrew, "MCI WorldCom: It's the Biggest Merger Ever. Can It Rule Telecom?," Fortune, April 27, 1998, pp. 118+.Lewyn, Mark, "MCI: Attacking on All Fronts," Business Week, June 13, 1994, pp. 76--79.------, "MCI Is Coming Through Loud and Clear," Business Week, January 25, 1993, pp. 84--85.Lipin, Steven, and Keller, John J., "WorldCom's MCI Bid Alters Playing Field for Telecom Industry," Wall Street Journal, October 2, 1997, pp. A1, A8.Mehta, Stephanie N., "WorldCom Quietly Completes MCI Communications Purchase," Wall Street Journal, September 15, 1998, p. B6.Naik, Gautam, and Keller, John J., "BT Cuts Purchase Price for MCI by $5 Billion," Wall Street Journal, August 25, 1997, p. A4.Schiesel, Seth, "The Re-engineering of Bernie Ebbers," New York Times, April 27, 1998, pp. D1, D5.Selz, Michael, "LDDS Communications Wins Big by Thinking Small," Wall Street Journal, July 26, 1991.Simon, Samuel A., After Divestiture: What the AT&T Settlement Means for Business and Residential Telephone Service, White Plains, New York: Knowledge Industry Publications, 1985.Sprout, Alison L., "MCI: Can It Become the Communications Company of the Next Century?," Fortune, October 2, 1995, pp. 107+.Spurge, Lorraine, Failure Is Not an Option: How MCI Invented Competition in Telecommunications, Encino, Calif.: Spurge Ink!, 1998.Stone, Alan, Wrong Number: The Breakup of AT&T, New York: Basic Books, 1989.Thomas, Emory, Jr., "LDDS Prospers Through Aggressive Acquisitions," Wall Street Journal, May 9, 1994, p. B4.Thomas, Emory, Jr., and Caleb Solomon, "LDDS to Buy WilTel Unit from Williams," Wall Street Journal, August 23, 1994, p. A3.Tunstall, Brooke W., Disconnecting Parties, Managing the Bell System Breakup: An Inside View, New York: McGraw-Hill, 1985.Ward, Judy, "Critic's Choice: As It Steps Out from AT&T's Shadow, MCI Finds Itself More Scrutinized Than Ever," Financial World, July 18, 1995, pp. 32--34.

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