How can a company that almost no one had ever heard of bid $30 billion? Easy. The Canadian-born Ebbers, who’s lived in Mississippi since college and puts on a great good-ole-boy act, has created a currency that’s better than money. It’s called WorldCom stock. Money is, well, just money. But WorldCom stock has been magical. If you invested a dollar in WorldCom at the start of 1990, you had $225 worth of stock on Sept. 30, according to Bloomberg Financial Markets. Your investment doubled in value every 12 months. Money can’t do that.
Plenty of companies have used their stock as currency for big buys–Henry Silverman’s HFS and Wayne Huizenga’s Republic Industries come to mind–but Ebbers makes them look like pikers. If Ebbers gets MCI and two other pending WorldCom deals go through as planned, WorldCom will have printed an astounding 1.4 billion shares since Dec. 30, worth $45 billion to $50 billion, depending on how you do the math. No one but the U.S. Treasury has peddled that much new paper during the same period.
Unlike the Treasury, which can always find buyers if it pays enough interest, companies can flood the world with new stock only as long as its price holds up. So far, Wall Street loves Ebbers, because it thinks he’s doing nifty things. Besides, he says that buying MCI would increase WorldCom’s profits per share. Someday, the Street will grow disenchanted. But for now, the more things Ebbers buys with stock, the more the Street loves him.
One other amazing thing. If all these deals go through, the value of WorldCom’s shares will be within sneezing distance of AT&T’s. Hard to believe, but true. WorldCom would have 1.83 billion shares outstanding, by my math. At Friday’s closing price of $369/16, WorldCom’s stock would be worth $67 billion. AT&T’s 1.62 billion shares were worth $74 billion.
Not only does Ebbers print stock, but he can hand out tax savings, too. Consider his pending purchase of CompuServe, the ailing online service provider owned mostly by H&R Block, the tax-preparation people. WorldCom is buying Compu-Serve for stock worth $1.4 billion at Friday’s closing price. Then it will trade the service’s customers and $175 million in cash to America Online for the AOL operation that carries Internet communications.
WorldCom will pay Block $1 million in cash, in addition to about $1.1 billion in stock. Why the tiny dollop of cash? To save taxes for the tax mavens at Block. For reasons too complicated to go into here, having cash in the deal will reduce Block’s taxable gain by about $400 million. That cuts its taxes by about $230 million, according to my interpretation of Block filings; the company says it will save ““more than $100 million’’ in taxes but declined to comment further. And because of the way the deal is structured, AOL and WorldCom will be able to write up the value of Compu-Serve’s assets for tax purposes, giving them $800 million worth of deductions that will save them about $300 million in taxes over several years. Pretty slick.
Can WorldCom keep up this pace for-ever? Obviously not. If you take the company’s projected $67 billion of stock-market value and apply the 225-to-1 return investors have earned since 1990, WorldCom stock has to be worth $15 trillion in 2006. That’s more than the current value of the entire U.S. stock market.
The key now is whether Ebbers can actually pull off his master plan: to use the assets he’s buying to offer customers one-stop shopping for local, long-distance and Internet services. It really is amazing. A decade ago AT&T owned the world and Ebbers was a pimple. Now Ebbers is buying the world–or trying to–while AT&T can’t figure out what to do with itself. An example of why predicting the future is so perilous. And why watching business is so much fun.
