MCI isn’t the bargain would-be buyers envision

MCI’s proposed new deal structure is clearly targeted to appeal to two types of buyers: telcos that don’t want or need a consumer-services business, and professional-services firms that want to enter the telecom market but lack networks. For both, the deal appears to offer the killer combination of a blue-chip enterprise customer list and a world-class network. Not so fast. Both the assets MCI is attempting to showcase come with hidden gotchas.

Word is that MCI‘s on the block, five months after formally emerging from bankruptcy this spring. The company will reportedly be sold in pieces rather than as an integrated entity. The consumer business would be sold to a private equity firm, and the enterprise business unit picked up either by BellSouth, SBC, Qwest or Verizon, or a professional services firm such as IBM or Electronic Data Systems.

With all due respect to the hardworking folks at MCI, I’ve got two words for anyone looking to buy a piece of it: caveat emptor.

Yep, buyer beware. MCI’s proposed new deal structure is clearly targeted to appeal to two types of buyers: telcos that don’t want or need a consumer-services business, and professional-services firms that want to enter the telecom market but lack networks. For both, the deal appears to offer the killer combination of a blue-chip enterprise customer list and a world-class network.

Not so fast. Both the assets MCI is attempting to showcase come with hidden gotchas.

Take that world-class network. MCI originally was created by amalgamating dozens of smaller telcos with disparate switching infrastructures, operations support systems and business support systems – leaving enormous redundancy and complexity in the infrastructure. In short, operationally that network is an unholy mess.

Telcos know this. That’s why MCI isn’t already part of, say, SBC or BellSouth. As one telecom executive put it, “Sure, I’d buy MCI, for the right price. I’d shut down their network and take their customers.” His point was that operating MCI’s network wouldn’t be cost-effective – so he’d acquire the customers and switch them to his company’s network.

So for MCI’s enterprise customers, a sale to another telco brings the strong possibility of getting switched to another network – with all the concomitant disruption. Who needs the hassle? Enterprise customers that want to be on the networks of Verizon, Qwest, SBC or BellSouth can move there today – and probably negotiate better terms and conditions than they’d get by enduring a post-acquisition forced switch.

And that blue-chip customer list? Potential purchasers – telcos or not – need to be supremely cautious of the promise of “acquiring customers.” Remember when MCI sold its Internet business unit to Cable & Wireless for $1.75 billion in 1998? C&W subsequently sued MCI for failing to transfer the customers it promised. MCI’s defense was that it couldn’t force customers to stay with the new owners – which would apply here as well. C&W ultimately divested itself of its U.S. operations for a measly $125 million in a bankruptcy fire sale last December. Clearly the strategy of acquiring MCI’s customers failed miserably for C&W.

MCI’s back-up strategy is to try to sell the enterprise business to companies that aren’t traditional telcos and therefore don’t have their own networks. But if such companies really want to get into the telecom business, they’d probably be better off building a new network from scratch – one that’s designed from the get-go to be operated efficiently.

As noted: caveat emptor.