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From Site Selection magazine, May 1999 C O V E R S T O R Y 
Once upon a time, many pundits snickered at WorldCom’s humble beginnings. After all, WorldCom sprang to life at a 1983 brainstorming session inside a Days Inn coffee shop in little Hattiesburg, Miss. (pop. 100,000). A waitress even suggested the initial, prosaic moniker, Long-Distance Discount Service (LDDS). Even five years ago, with WorldCom launching thunderbolts that rattled the US$700 billion telecom industry, some critics still scoffed at the company’s rural epicenter in Jackson, Miss. (metro-area pop. 400,000), a supremely out-of-the-way locale, site selection elitists sniffed. Well, once upon a time is over, and so are the snide barbs. What was once LDDS has become the little company that could — only now it’s anything but little. “Once a mouse among elephants, WorldCom is now bringing the elephants down,” says Dan Akerson, Nextel Communications CEO and a former president of MCI, itself now officially part of WorldCom as of Sept. 14, 1998. Telecom’s reigning PacMan, what’s now MCI WorldCom, after gobbling up a huge market swath in a merger and acquisition whirlwind, packs a potent global punch: It’s No. 19 on the Fortune 500, with annual revenues of $33 billion-plus and a real estate portfolio that stretches over 29 million sq. ft. (2.6 million sq. m.) in 65 nations. Indeed, MCI WorldCom seems to have all the pieces to become the first global, one-stop communications shop, providing phone, data, entertainment and Internet services in a seamless digital network with end-to-end connectivity. So are any pieces missing in MCI WorldCom’s ambitious designs for global domination?
Consider MCI WorldCom’s presence in Europe, where it’s building a 2,000-mile (3,200-km.) fiber-optic network. “We won’t expand through mergers and acquisitions in Europe like we did in the U.S., even though we’re growing very fast over there,” says Brooks Warren, vice president of real estate and facilities management. “That’s because we’re on the cutting edge of marketplace development there. At this point, there’s nobody [in Europe] that’s ahead of us that we can buy.”
Some things, however, haven’t changed, including an MCI WorldCom headquarters still solidly rooted in southern Mississippi. “Well, you have to understand where we came from,” explains Ebbers, 56, a rangy Canadian native who arrived on a basketball scholarship in the 1960s at Mississippi College, where he earned a physical education degree. “We are not here because we decided 10 years ago that we were going to be x-size company, and, oh, yeah, Jackson would be a good headquarters. “We work here in Mississippi because we started here, and we are certainly happy here. Those of us working out of Jackson intend to continue working out of Jackson,” says the CEO, a Willie Nelson devotee who often ambles through headquarters gnawing a cigar and wearing faded jeans and cowboy boots From its Jackson nerve center, MCI WorldCom has assembled a byzantine real estate network, the offshoot of a M&A blitzkrieg that includes 68 acquisitions in the last four years alone. “We don’t know exactly how much real estate we’ve got, but we’ve got a good idea,” says Warren. “We own roughly 4 million sq. ft. (360,000 sq. m.) of our 29 million sq. ft. If we were out on the market trying to sell our owned real estate assets, we’d probably have a couple billion dollars worth.” Warren discloses that stunning dollar figure with disarming matter-of-factness. Make no mistake, though. What MCI WorldCom is doing is real estate juggling elevated to high, dangerous art. Its bold, $40 billion MCI acquisition is unlike anything the brassy upstart has tackled. After all, its stunning, all-stock 1997 buyout bid was for a firm whose revenues tripled WorldCom’s take. It’s a striking measure of WorldCom’s audacity that it snatched MCI out from beneath the beak of British Telecom, a long-time MCI suitor with a more “proper” telecom pedigree, many analysts felt. Now, though, comes the hardest part: putting the pieces together. As Legg Mason Wood Walker analyst Scott Cleland explains, “Compared to all the other companies WorldCom has swallowed, MCI is like a big whale.”
With its original 75,000-plus employees and 22 million global customers, the merged MCI WorldCom is still taking shape. Already, though, it’s realizing major savings, with a substantial portion coming through sagely dovetailing its real estate acquisitions. You’d expect economizing from Ebbers, who favors cabs and discount hotels and still mows his own grass. He wasted little time in selling two jets owned by MCI, whose corporate culture was far more plush than lean-‘n-mean WorldCom. (Ebbers also sold a WorldCom jet, but kept three MCI jets to quickly reposition personnel when opportunity or trouble come knocking on short notice.) In truth, the jet sell-off yielded meager savings. Nonetheless, it sends a symbolic message to Wall Street that’s backed by substance. Ebbers, who’s always scrutinized every budgetary line item, has ambitiously pledged to cut 1999 expenses by $2.5 billion. (British Telecom cited a similar cost-cutting figure if it acquired MCI, only over five years, not one.) Part of those savings are coming through late-1998’s 2.7 percent work-force cut, most involving U.S.-based software engineers and programmers. MCI WorldCom, however, has rewritten the telecom rules not by shrinking, but by seizing the pieces needed for market dominance. Accordingly, MCI WorldCom says some $1.2 billion in 1999 savings will come from synergies among its savvy acquisitions. The strategies underpinning those acquisitions have included a sharp look at how a smorgasbord of facilities fits together. For example, WorldCom’s MCI bid coincided with its $2.4 billion acquisition of Brooks Fiber, which had something vital that MCI didn’t: local network facilities in 44 U.S. cities, only a fourth served by WorldCom. “MCI already had an in-place facilities network, but it didn’t have hardly any local facilities,” Ebbers explains. “So we bought Brooks Fiber, as well as MFS Communications (acquired for $12.5 billion in December 1996). Those are really the companies that brought us local facilities networks. That’s why we bought them.” Ostensibly, Ebber’s explanation is simple stuff. In telecom’s turbulent environment, though, MCI WorldCom’s get-to-the-point focus has been a major strength. Much as the profound simplicity of the Mississippi Delta’s raw, deep blues remade popular music, Mississippi-based MCI WorldCom has changed the telecom tune. Its strategy in navigating worldwide telecom deregulation has been the model of focused aggressiveness. For example, it’s substantially cut capital expenditures for facilities by positioning itself to sell local phone service to MCI’s long-distance customers. In sharp contrast, most Baby Bells have focused on delaying competition. “The regional U.S. phone companies aren’t taking risks; they aren’t innovating,” says James Moore, president of Boston-based Geopartners Research.
Single-minded focus has also informed MCI WorldCom’s strategy of acquiring huge tracts of largely vacant land, transactions that some firms equate with root canal surgery. MCI WorldCom, though, forges ahead in full PacMan mode, leveraging its economic impact to make large chunks of open acreage a bottom-line virtue. “We have four major projects going on right now: one here in Clinton (a Jackson suburb), one in Tulsa (Okla.), where we now have 850,000 sq. ft. (76,500 sq. m.), a customer service center in San Antonio (Texas) and a big consolidation in northern Virginia,” Ebbers explains. “On all those projects, we’ve bought big pieces of land, much more than we would use, and built campus-like multi-building arrangements, where we can add pieces as our labor force grows.” MCI WorldCom has made that strategy work through another simple but powerful real estate truism: Wherever it sets up a major presence, others are eager to follow. “We’ve also bought those big pieces of land for the economics. As we move into these locations, the value goes up substantially,” Ebbers says. “Then we sell off pieces of the land, which helps reduce our net cost.” Given the company’s pronounced M&A bent, MCI WorldCom’s large land tracts also provide opportunities to consolidate formerly separate operations, cutting real estate expenditures through economies of scale. “Certainly, one of our priorities in these mergers is to consolidate people into fewer locations, as we’re doing in Virginia, where we’re bringing together 10-12 separate operations. It will also serve as our Internet headquarters for UUNet (the world’s largest Internet service provider, part of the MFS acquisition). “Reducing our real estate costs is one of the synergies that we hit under these [M&A] transactions.”
Part of MCI WorldCom’s consolidation strategy is taking shape near Ebber’s office in Clinton: its 12-story, 420,000-sq.-ft. (37,800-sq.-m.) headquarters complex on 84 acres (34 ha.), a relocation from Jackson to accommodate its blur-like local growth to 700 employees. Intent on retaining its roots, MCI WorldCom, however, didn’t try to break the incentives bank with its headquarters relocation. Says Brooks, “The only interaction we really had [regarding incentives] was to take advantage of those opportunities currently in place: certain tax use and sales tax incentives we get by direct purchasing during construction, plus some local, county and state tax programs available for a headquarters location. In addition, the highway department has been very, very helpful in making it possible for our employees to get to the location.” Though Ebbers often refers to MCI’s Washington, D.C., headquarters as “our co-headquarters,” real estate reshuffling could also be on tap there. “We own that (headquarters) building in D.C., but we have two other locations we lease there,” he says. “We don’t really know what we’ll do yet, but we certainly don’t need three locations.”
Given MCI WorldCom’s vast combined assets, further consolidations and disposals seem a certainty, as Warren acknowledges. “We will look at the real estate situation and evaluate every asset equally, whether it’s owned or leased, and make the determination on a hub-city or city-by-city basis,” Warren explains. “So there’s always the possibility that when it’s to our economic advantage we’ll dispose of some of the old MCI properties and the old WorldCom properties.” One big shoe in that disposal strategy hit the floor on Feb. 11: Mirroring late-1998’s AT&T-IBM agreement, MCI WorldCom and Texas-based Electronic Data Systems (EDS) announced a complex, $17 billion computer services deal swapping assets and 13,000 employees. The world’s No. 2 computer services firm, EDS is buying MCI WorldCom’s information technology services unit for $1.65 billion and acquiring more than 12,000 MCI WorldCom employees. EDS will outsource most of its voice and data communications services to MCI WorldCom, a 10-year agreement valued at $6 billion to $8.5 billion. In exchange, MCI WorldCom will outsource to EDS most of its infrastructure services, and computer applications development and maintenance, a 10-year agreement worth between $5 billion and $7 billion. MCI WorldCom will also offer jobs to some 1,000 EDS employees.
The outsourcing deal, which will cut both firms’ costs by 10 percent, may sound like the onset of the wholesale layoffs often following mega-mergers. But Ebbers’ game plan calls for adding 8,000 employees a year. “You have to keep labor a percent of sales,” he explains. “You take our total employees, divide that into revenue, and you get revenue per employee. We increase that efficiency every year, but we’ll still be needing about 8,000 additional people a year.” Some signs support Ebbers’ bullish predictions: MCI WorldCom’s annual revenues have been growing by 20 percent; fourth-quarter 1998 earnings of $428 billion marked a 500 percent increase. Its booming stock, which has traded at 90 times company earnings to fuel the all-paper M&A juggernaut, also remains strong. Jack Grubman, Salomon Smith Barney’s top telecom analyst, calls MCI WorldCom “the ‘must -own’ growth stock.” Add to that the opportune positioning of the networks and facilities MCI WorldCom has assembled; encircling a host of major world cities’ business districts, they provide prized access to a big-ticket market. Nonetheless, substantial speed bumps loom in MCI WorldCom’s fast-lane infobahn ride. “Despite their explosive growth, without major changes, MCI WorldCom’s going to begin having problems,” says James Freeze, an analyst with Cambridge, Mass.-based Forrester Research. In MCI, WorldCom acquired a lagging performer heavily dependent on voice traffic, a declining telecom sector. Moreover, MCI’s network is very old, lacking cutting-edge features like packet-switching. “MCI increases WorldCom’s networks’ average age and cost,” says Mark Bruneau, head of Boston-based Renaissance Worldwide’s telecom practice. This summer, MCI WorldCom will unveil a major MCI network overhaul. That, though, will require massive capital expenditures; AT&T, for example, took a staggering $7 billion write-down in 1987, only a year after it began digitizing its old network. Such a potential balance-sheet black hole is going to make it tough to fund “normal” MCI WorldCom capital expenditures, which totaled $6.4 billion in 1998.
MCI WorldCom’s seeming salvation lies in two words: international and Internet. It’s telecom’s dominant cyberspace player, with a network controlling some 57 percent of the Internet access market, according to Yankee Group research. But the MCI merger diluted some cyber-clout, as regulatory approvals required MCI to divest all of its Internet assets. Ebbers, however, emphasizes, “We didn’t sell any Internet assets to [UK-based] Cable & Wireless (C&W), just customer base. There is really not a legitimate reason we had to sell. The reason we were told we had to sell was that we already had so much of Internet business through UUNet (which focuses on business users). But we’re still very much focused on the Internet.” Indeed, analysts anticipate a 60 percent spike up in MCI WorldCom’s 1999 revenues from Internet communications. And that estimate was came before Ebbers & Co. demonstrated yet more fancy footwork. Not for nothing does Business Week say Ebbers “makes every other telecom executive look like a foot-dragger.” Only four months after the MCI divestiture, they were back into the Internet consumer market. In early February, MCI WorldCom announced its partnership to provide consumer Internet services with a competitor: America OnLine’s CompuServe unit. The AOL tie marks an evolution from 1998’s complicated three-way deal, in which AOL acquired CompuServe and sold off CompuServe’s network facilities to WorldCom, the principal network capacity supplier for both AOL and CompuServe. Such extra gyrations won’t be necessary in the international arena, where MCI WorldCom’s pronounced aggressiveness has put tremendous pressure on other players to speed up expansion. MCI WorldCom’s formidable non-U.S. portfolio includes a controlling interest in Embratel, Brazil’s only nationwide network; a digital network it’s building, with Spain’s Telefonica International, to link Latin American business centers; and half ownership (with C&W) of the Gemini transatlantic submarine cable. In addition, it’s the first foreign telecom in Japan to offer voice-data services over its own network in Tokyo. Ebbers vows to continue expanding globally, where he sees the greatest growth: “We are going to be building networks in additional cities around the world. This year we’re building out new cities across Europe and in a city in north Japan.”
Still, MCI WorldCom’s near-term road looks rough. It would be sheer folly, though, to sell short a company that’s skyrocketed by pugnaciously confounding expectations. In fact, at the press conference announcing the MCI bid, Ebbers cracked, “My second choice was AT&T [but] they didn’t know who we were.” But was it really a joke? After all, MCI WorldCom’s $100 billion capitalization rivals AT&T. Consider AT&T officials’ response to Ebbers’ bold crack: No comment, they said, a wise tack in dealing with the onetime Mississippi mouse that roars. SS
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“No,” calmly replies says President and CEO Bernard Ebbers (right), a onetime high school basketball coach who embodies MCI WorldCom’s nervy, opportunistic style. “Are there locations around the world that we are continuing to build out? Oh, yes. But is there any area in which we need more telecom assets in order to be a dominant world player? No.”
Getting the Right Facilities Fit
