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WorldCom Ban Seen as a Boost for Its Rivals

The firm's suspension from competing for government contracts could help AT&T, Sprint and others, analysts say.

August 04, 2003|From Reuters

PHILADELPHIA — WorldCom Inc.'s suspension from competing for lucrative government contracts could be a short-term windfall for rivals, especially No. 1 U.S. long-distance telephone company AT&T Corp., analysts said.

The General Services Administration on Thursday temporarily banned WorldCom, which plans to change its name to MCI, from winning contracts, saying the firm lacked proper internal controls and business ethics.

"Obviously, this is a big short-term win for AT&T and Sprint [Corp.],and to a lesser extent Qwest [Communications International Inc.] and even Level 3 [Communications Inc.]," Guzman & Co. analyst Patrick Comack said.

Adding to WorldCom's woes, the Justice Department, the Federal Communications Commission and Congress recently began probing whether the company illegally routed telephone calls to avoid paying connection fees to other carriers.

New York-based AT&T, more so than smaller rivals, is expected to benefit from the freeze on WorldCom because it already does substantial work for the government.

"AT&T's network scale and scope will give it a distinct advantage versus Sprint in terms of bidding for future government contracts," Bear Stearns analyst Robert Fagin said.

AT&T and Sprint declined to comment.

Shares of AT&T rose 4% on Friday, to $22.10 in heavy trading on the New York Stock Exchange. Shares of Sprint's FON Group, which includes its core long-distance telephone and data business, gained 2.1% on Friday, to $14.42.

The GSA decision allows WorldCom to keep existing government contracts, which tend to be multiyear agreements. WorldCom, which filed for bankruptcy protection last year amid an $11-billion accounting scandal, would be shackled only in its efforts to land new contracts.

WorldCom said about 6% of its annual revenue, or about $1 billion, comes from public-sector contracts. About 60% to 70% of that business is affected by the GSA decision.

David Barden, an analyst with Banc of America Securities, estimated that about $300 million in new contracts may be up for grabs each year, assuming each contract lasts three years. That amount could increase in 2004 with the expiration of a particularly large contract in January, he said.

Firms hoping to pick off some of WorldCom's government business may have difficulty, however, because some services use the company's infrastructure, which would be costly and time-consuming to replicate.

Such extensive overhauls may be unrealistic unless the GSA extends WorldCom's ban for as many as three years, analysts said.

Although the government business reflects a relatively small amount of WorldCom's overall revenue, the debarment and lingering concerns about WorldCom's ethics overhaul could spook other large customers as well, analysts said.

"State governments, municipalities, Fortune 500 companies and foreign institutions may all be affected by the federal government questioning MCI's controls and ethics," Banc of America's Barden said.

To distance itself from its past -- aside from its pending name change plans -- WorldCom has revamped its board and top management team, changed procedures in its financial and accounting departments and started a "zero-tolerance" policy for wrongdoing.

Any lasting market share shifts depend on how quickly WorldCom can revamp its corporate culture, analysts said.

Ashburn, Va.-based WorldCom has said there is more work to be done. It expects to name new board members Aug. 15 and to hire an ethics officer.

The company has 30 days to appeal the GSA's findings or submit additional information pleading its case for a limited suspension, after which the GSA would have another month to decide the length of the freeze.

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