Business Transaction: MFS Merges with WorldCom

WORLDCOM, INC.
515 Fast Amite
Jackson, MS 39211
(601) 360-8600
Nasdaq: WCOM

MFS COMMUNICATIONS CO., INC
3555 Farnam Street
Suite 200
Omaha, NE 68131
(402) 231-3000
Nasdaq: MFST

Last August WorldCom, Inc. and MFS Communications Company, Inc. jointly announced that they will merge into one of the world's eminent business communication companies. WorldCom, the fourth largest long-distance carrier in the nation, will acquire MFS, a local and long-distance firm focusing on business and government markets. The move followed soon after the $2 billion merger of MFS with UUNEI, the largest provider of Internet services to commercial clients.

Lowered Costs and Integrated Services
The justification for the WorldCom/MFS merger is two-fold: reduced costs and a better position within the telecommunications arena. Through shared services and equipment, the organizations hope to reduce expenditures in the realm of line and access costs, usually a major burden to Internet providers. The merger will also eliminate duplication of capital spending programs, such as international facilities and undersea capacity. Additionally, the combined company, MFS WorldCom, can take full advantage of a changing telecommunications environment spawned by the Telecom Act and the FCC Interconnection Order, by providing fully integrated services.

The end result? MFS WorldCom can offer "one-stop" shopping: a full spectrum of local, long-distance, Internet and international services over an advanced fiber optic network provided by a single vendor. In the U.S. alone, the network will connect all major metropolitan areas with an end-to-end fiber network spanning 25,000 miles.

Merger Details
The terms of the agreement provide for an exchange of 2.1 shares of WorldCom, Inc. common stock for each share of MFS common stock. Each party has the option to purchase up to 19.9% of each other's outstanding shares, with WorldCom's option to acquire MFS shares at $55.39 and MFS' option to acquire Worldcom shares at $26.38. The merger will be accounted as a purchase. A major portion of the purchase price will be allocated to intangible assets, which will be amortized over 40 years.

Market Reaction
Although the merger should place the combined MFS WorldCom in an improved position within the competitive and changing telecommunications field, stock prices of both companies have dropped in recent months. At the time of the agreement in August, total MFS stock was valued at approximately $14 billion; though within the first week, declining WorldCom prices diluted the value of the deal to approximately $8 billion. The drop can be attributed to a predicted dilution of earnings, primarily because MFS Communications operated at an earnings deficit.

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