Desperate to boost its stock price and regain favor with Wall Street, communications giant WorldCom Inc. said Wednesday that it will split the company in two and begin paying dividends as part of a major restructuring that mimics moves made last week by rival AT&T Corp.
The reaction on Wall Street, however, was not what WorldCom had in mind. Far from reviving the company's sinking stock price, disappointed investors pummeled WorldCom shares anew, sending the stock down $4.81, or 20%, to close at $18.94 on the Nasdaq, WorldCom's lowest close in more than three years. More than 195 million shares traded, making it the third-most-active stock in U.S. history.
Mississippi-based WorldCom didn't help its case Wednesday, coupling the restructuring announcement with projections of lower sales and earnings through 2001--a disappointment that some analysts believe sparked much of the stock's subsequent free fall.
AT&T also reduced earnings and revenue projections when it unveiled its reorganization plan a week ago.
"Both AT&T and WorldCom used this as an opportunity to pretty significantly cut their forward guidance on earnings and revenues," said Mel Marten, a telecommunications analyst with Edward Jones. "So they have lost some credibility and it will take awhile for them to earn that back."
Under WorldCom's reorganization, which has been expected for weeks, the company will divide itself into two parts: a high-growth business devoted to data, Internet, Web hosting and international markets and a separate dividend-paying business focused on the dial-up Internet access and consumer, small business and wholesale long-distance markets.
The two units will be traded separately through the creation of "tracking" stocks, which will allow WorldCom to control the operations while shareholders get a clearer view of each unit's performance.
Industry analysts generally have supported the shake-ups at AT&T and WorldCom, but many also have criticized the shift to tracking stocks as a form of "financial engineering" aimed solely at getting a share-price boost without addressing the businesses' core problems.
WorldCom executives have flinched at the suggestion.
"The comment has been made that this is financial engineering, but it is certainly far from it," said Brian Brewer, a WorldCom senior vice president. "I don't think we have convinced Wall Street yet, and I think that shows in the stock price. The proof will be in the execution, and the Street will reward us when we can execute."
AT&T, which last week announced plans to divide itself into four businesses, has not fared much better. After a slight uptick, shares in the nation's largest long-distance provider continued their slide, and on Wednesday fell $1.19 to close at $22 on the New York Stock Exchange.
AT&T and WorldCom, the nation's two largest long-distance providers, have seen their stocks lose nearly two-thirds of their value this year as the consumer long-distance business dropped off faster than expected, and both companies missed revenue and earnings targets.
The No. 3 U.S. long-distance company, Sprint Corp., also has suffered through a steep slide in its stock price that started after federal regulators nixed its planned merger with WorldCom. Sprint, whose shares fell $2.50, to close at $23 Wednesday on Nasdaq, will brief analysts on its strategy Friday, but industry experts do not expect the firm to unveil a major restructuring plan.
"Wall Street doesn't know who the winners are going to be in this market . . . investors are confused, and a confused mind says no," said Jeffrey Kagan, a telecommunications industry analyst based outside Atlanta. "But WorldCom's restructuring is not like AT&T's, and this should be well-received after an adjustment for the earnings warning gets factored in."
In announcing the WorldCom plan, Chief Executive Bernard Ebbers did not exude his usual swagger, and admitted to being humbled by the firm's predicament.
He even admitted to reporters that "With the recent performance of the stock . . . people have a right to ask the question of whether I have the ability to lead this company."
Ebbers, who will remain WorldCom's chief executive, said he remained confident about the company's future. But he complained that regulatory intervention has destroyed the competitive market for the once-powerful long-distance carriers by blocking WorldCom's merger with Sprint, approving mega-mergers among local phone companies, and in giving a big advantage to local phone companies entering long-distance.
WorldCom's high-growth unit, to be traded under the "WCOM" symbol, will post revenue of $23 billion this year and generate about $9.5 billion in operating cash. The consumer unit will trade under the symbol "MCIT," and will have an estimated $16.5 billion in sales this year, along with operating profit of $4.5 billion.
WorldCom said it will assign a higher percentage of the firm's debt to the high-growth unit, and that the MCI segment will pay $300 million per year in shareholder dividends. Once the tracking stocks are approved, stockholders will receive one MCI share for every 25 of WorldCom held.
Both of the tracking units will be governed by the WorldCom board of directors.