Telecommunications powerhouse WorldCom Inc. announced Tuesday that it will gain a controlling interest in Digex Inc. through a nearly US$6 billion merger deal with Intermedia Communications Inc.
The deal will accelerate by 12 to 18 months WorldCom’s ability to provide managed Web and application hosting, said Bernard Ebbers, WorldCom’s president and CEO. The board of directors of WorldCom, Intermedia and Digex approved the deal last Friday.
The merger will expand the “building blocks” of WorldCom’s Web activities that fall under the name “Generation D” (for digital), Ebbers said at a teleconference Tuesday. In April, WorldCom officials announced the Generation D initiation, including an e-business toolkit and turnkey Web offerings.
“This is a very significant transaction for us, not for its size, but its strategic direction for WorldCom,”
Ebbers said.
Digex will retain its company name, but will supply products, services and management services for WorldCom to develop its Web hosting capabilities. Asked about the relationship Digex will have with WorldCom subsidiary UUNet Technologies Inc., in Fairfax, Virginia, Ebbers emphasized that the companies will operate separately.
The Intermedia acquisition and controlling interest in Digex will not be the only move for WorldCom in the Web hosting market, suggested Courtney Munroe, director for Web hosting services at International Data Corp. (IDC). This particular move bumps WorldCom from fifth in the market to the number two position behind Exodus Communications Inc, he said. Digex holds the number seven position in the $1.8 billion Web hosting market, according to 1999 figures, he said.
WorldCom will hold about 9 percent of the Web hosting market, just behind Exodus, Munroe said. He said WorldCom’s data centers will be integrated with Digex’s high-end managed services expertise.
Another analyst suggested WorldCom’s acquisition was a wise move.
“What WorldCom lost in the wireless space when the Sprint merger went down in flames they made up for with this Intermedia-Digex deal in the Internet, ASP (application service provider) and e-commerce space,” said Jeff Kagan, [cq] a telecom industry analyst in Marietta, Georgia, who offered comments via e-mail. “WorldCom continues to have one of the strongest networking stories in the business, and this deal should help them quickly move beyond the network opportunities and let them cash some of the big checks in the web hosting and e-commerce side of the fence. It should help them round out their Internet-ASP-e-commerce offerings.”
WorldCom attempted to merge with Sprint Corp., however, the companies ran into regulatory road blocks and called off the planned marriage in July.
Under terms of the Intermedia-Digex agreement, each share of Intermedia common stock will be exchanged for $39 of WorldCom common stock, WorldCom said. In addition, each share of Intermedia preferred stock will receive WorldCom preferred shares that will have terms essentially identical to the Intermedia preferred shares, except that the issuer will be WorldCom.
The deal is worth about $6 billion, with $3 billion going to equity and another $3 billion going to debt and preferred stock, the company said.
Through its merger with Intermedia, WorldCom will possess 55 percent of Digex’s equity interest and 94 percent of Digex’s voting interest, according to a company statement.
Digex provides managed Web and application hosting services. Digex provides such services as electronic retailing, online financial services, online procurement and customer self-service applications. Tampa, Florida-based Intermedia Communications is a CLEC (competitive local exchange carrier), a frame relay provider, a systems integrator provider, an ISP (Internet service provider) and a multi-tenant services provider.
Shares of WorldCom were down $2.75 to $34.18 at midday Tuesday with trade volume exceeding 31.4 million shares.
Market researcher IDC, in Framingham, Massachusetts, is owned by International Data Group Inc., the parent company of IDG News Service.
WorldCom, in Clinton, Mississippi, is at http://www.wcom.com. Intermedia, in Tampa, Florida, can be contacted at +1-813-829-4409 or http://www.intermedia.com/. Digex is a wholly owned subsidiary of Intermedia and can be reached at http://www.digex.com.