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MARKET BEAT / TOM PETRUNO

MFS-Uunet Stock Deal Shows How Timing Is Money

May 01, 1996|TOM PETRUNO

New stock issues rarely vanish from the market as quickly as Uunet Technologies plans to: The Internet-access provider, which went public last May 25, on Tuesday agreed to a $2-billion takeover offer from business phone services company MFS Communications.

MFS's stock-swap offer values Uunet at nearly $62 a share, sending its stock up $10.50 to $58.75 on Nasdaq on Tuesday. That's a decent takeover premium, but it still may leave plenty of Uunet owners unhappy: Some of them paid as much as $98.75 a share for the stock in the frenzy for Internet-related issues last year.

Uunet shares' rise, fall and imminent disappearance speaks volumes about the fast-changing telecommunications industry landscape, of course. The Uunet-MFS merger also says a lot about the importance of size in business, even as smaller-company stocks have stolen the spotlight from big-company issues in recent weeks.

And finally, the deal is a reminder of just how much a company can do with a rich currency--i.e., a high stock price--and how entrepreneurial dreams can crumble when that currency loses value. It isn't ego alone that drives executives to obsession about keeping their share prices up.

Uunet's decision to sell out so soon after its stock offering is definitely the exception rather than the rule. Securities Data Co., which tracks new issues, counts only eight other 1995 new issues that have become takeover targets to date, of 572 total. Most companies, after all, go public with the idea of remaining independent for years to come.

"It's pretty early in Uunet's life cycle to be making this kind of move," agrees Timothy W. Summers, analyst at Principal Financial Securities in Chicago. "But it also seems like the life cycles of [Internet-related] companies are more compressed than those of any other industry now."

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Indeed, "leadership" within the huge universe of Internet companies (access providers, software firms, Web page designers, etc.) changes almost day to day. Who knows how many of the firms will survive in the long run--or even in the short run, given the speed with which the Net is developing and the number of huge players (AT&T, Microsoft, Sun Microsystems and many others) trying to steer if not dominate that development.

For MFS, which has built a strong franchise competing against the Baby Bells to supply local phone service to businesses nationwide, Uunet's booming corporate Internet-access business seemed like a natural fit. Uunet Chief Executive John W. Sidgmore apparently wasn't too tough to convince. "I think Uunet realized that without its own phone network, they would have a tough time" competing down the road as Net access becomes more of a commodity business, said Ryan Jacob, analyst at the New York-based IPO Value Monitor newsletter, which tracks new stocks.

Uunet's decision also suggests an awareness that, increasingly, critical mass counts in servicing a global phenomenon like the Net, despite Wall Street's seeming fascination with every boutique Internet-related stock issue that hits the market.

Uunet's stock obviously fascinated a lot of investors last fall. But when AT&T announced its own consumer Internet service this year, the bloom quickly came off Uunet stock and those of other access providers. CEO Sidgmore protested, in vain, that Uunet served business customers, not fickle consumers. But Wall Street nonetheless slashed Uunet's stock from nearly $100 to $25 by March.

Sidgmore needed a high stock price to pursue his dream of quickly building Uunet into a much bigger business. He planned to offer 6.6 million new shares to the public in March, hoping to raise funds to buy undersea and European fiber-optic cable capacity to expand Uunet's global network. But as the stock crashed, Sidgmore abandoned the idea of selling more shares. He would just have been giving equity in the business away too cheap.

Timing is everything, as they say: Sidgmore should have floated more stock in November, when investors couldn't get enough of Uunet. Now MFS has the timing advantage. With its shares near a record high, double the year-ago price, MFS is using that rich currency to expand its empire.

More consolidation within the newly deregulated telecommunications field is a virtual certainty. But how deals get done, and between whom, is to a significant degree up to the bull market. The firms with the strongest stocks are best positioned either to make acquisitions or to raise capital for future growth--and probably soon, says investment banker Michael McCaffery at Robertson, Stephens & Co. in San Francisco. "The companies' mentality is, 'I can't fall behind,' " he says.

Many companies with weak stocks, meanwhile, can only hope they'll be on the receiving end of takeover bids--and at fair prices--before stronger competitors overpower them.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Boom, Crash, Sell

Uunet Technologies' shares rocketed above $90 last year in the mania for Internet-related stocks, only to plunge back to the mid-$20s this year--before Tuesday's takeover offer. Closes on Nasdaq every other week since October, and latest:

Tuesday: $58.75, up $10.50

Source: Bloomberg Business News

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