MCI'S NEW EXTENSION

By John Greenwald

For more than two decades, scrappy long-distance carrier MCI has clamped onto AT&T like a demented terrier on a mailman's ankle and refused to let go. It was MCI's antitrust charges against the old Ma Bell that led to the breakup of AT&T's telephone monopoly. Now MCI is joining forces with British Telecommunications--Britain's formerly state-owned telephone company--to form an empire with the clout to go phone-to-phone around the world with AT&T and other giants.

In what would be the largest foreign buyout of a U.S. company if regulators approve it (an uncertain prospect, given likely resistance from rivals like AT&T), BT agreed Nov. 3 to pay about $21 billion for the 80% of MCI it does not already own. The merged company, to be called Concert, taking the name of a joint venture between the two, would have $42 billion in revenues and match AT&T in market value. The new colossus, boasts MCI chairman Bert Roberts, "will trump the competition as we open up communications markets both domestically and around the world."

Roberts is referring to the first of two trends that are driving the telecommunications industry toward consolidation. Deregulation--in the U.S., Western Europe and increasingly in South America and Asia--is turning cozy, inefficient state-owned monopolies into telephone free-for-alls. The second trend is technology, which has dissolved borders and allowed telecommunications companies to branch into cable television and information services. "The logic is simple," says James Ross, a telecommunications analyst for the ABN AMRO Hoare Govett brokerage firm in London. "In the end, the industry is going to be dominated by a small number of large players, and this makes it more likely that BT/MCI will be one of them."

Despite the global pretensions, Concert's first gig will be the $100 billion local phone network in the U.S. Hello, Baby Bells. Competition calling. The combination of MCI's hell-bent-for-market-share moxie and BT's muscle--Concert will have a cash flow of $12 billion--could wreak havoc in local markets, and that could be good news for anyone with a dial tone.

MCI's Roberts sounds as though he can't wait to start cutting rates: "The local market is the most profitable in the world--twice as profitable as the long-distance market. Simply put, rates will come down. I wouldn't be surprised that over time they came down by a factor of two." MCI is set to enter 25 local markets in January. Thanks to its national brand name and scrappy style, "MCI was ready to beat the crap out of the regional phone companies even before the British Telecom deal," says David Goodtree of Forrester Research, a Massachusetts consulting firm. With BT behind it, Goodtree observes, MCI could take a $10 billion bite out of the local phone market within three years. And with that as a base, MCI could expect to broaden its No. 2 share of the $65 billion U.S. long-distance market; that currently stands at 17.8%, vs. 53% for AT&T.

Merging the buccaneering MCI culture with tradition-bound BT could prove tricky. To preserve MCI's independent spirit, Roberts will serve as co-chairman with BT chief Iain Vallance and remain at MCI headquarters in Washington.

Outside the U.S. the two companies, which already operate in 72 countries, want to plug into Europe and Asia in a big way. That would mean head-to-head battles with such rivals as the partnership between AT&T and Unisource, a group of European telecommunications firms, and Sprint, the No. 3 U.S. long-distance outfit, which is 20% owned by French and German phone companies. A rich prize will go up for grabs in January 1998, when members of the European Union open their sluggish state monopolies to fast competition.

And how would you like to be AT&T's new president, John Walter? He's walking into a company in the throes of restructuring, and now has to deal with an archrival that just became a heavyweight. AT&T chairman Robert Allen didn't wait long to complain that the playing field is not level. AT&T, he asserted, faces barriers to providing full service in the United Kingdom, where BT controls more than 90% of the local phone connections. Allen urged regulators to make scrutiny of the merger "a global priority of the highest order." In the U.S., where BT will ask for a waiver of the 25% ceiling on foreign ownership of American communications companies, such scrutiny could take up to a year.

While AT&T might respond by attempting to buy a Baby Bell, any such move would raise a ruckus with regulators. In the short term, says Kevin Gooley, a telecommunications analyst for Standard & Poor's, "it doesn't bode well at all for AT&T."

--Reported by Bernard Baumohl and Jane Van Tassel/New York, Barry Hillenbrand/London and Adam Zagorin/Washington

With reporting by BERNARD BAUMOHL AND JANE VAN TASSEL/NEW YORK, BARRY HILLENBRAND/LONDON AND ADAM ZAGORIN/WASHINGTON