UUNet falls.

I Find Karma (adam@cs.caltech.edu)
Tue, 30 Apr 96 18:05:28 PDT

FALLS CHURCH, Va. (AP) _ MFS Communications Co. agreed Tuesday to buy
Internet access provider UUNet Technologies Inc. for $2 billion, one of the
largest technology industry takeovers and a challenge to local telephone
The merger gives the aggressive MFS a new weapon to pick off
lucrative business customers from local phone companies. MFS has become a
$500 million business by giving corporations and institutions cheaper
access to long distance companies than local phone companies do.
With UUNet, MFS can provide connections to the Internet as well.
``I think we have something unique here; a new kind of communications
company,'' said UUNet chief executive John W. Sidgmore. ``No one has both
pieces in one package.''
Falls Church-based UUNet connects more businesses to the Internet
than anyone, using higher-capacity lines than are typically available to
consumers. It has connection points in 543 cities and towns around the
world, nearly 300 outside the United States.
MFS' stock offer for UUNet amounted to $61.50 per share, a 27 percent
premium over UUNet's market value on Monday.
UUNet's stock rose $9.12{ per share to $57.37{, a 19 percent jump, on
the Nasdaq Stock Market Tuesday. MFS closed up about 6\ cents at $34.68},
also on Nasdaq. It will pay 1.78 of its shares for each of UUNet's 32.5
million shares.
There are a handful of similarly-sized companies that also provide
Internet access and their stock prices rose as investors speculated they
might also be takeover targets. For instance, Netcom On-Line Communications
went up $3.37{ to $35.87{ and PSINet Inc. jumped $2.37{ to $14.12{.
Potential acquirers include MFS rivals like the Baby Bell carriers,
four of which have said they will start Internet services. Those companies
must decide whether to invest build such service from the ground up or buy
a company that's already in the business.
In addition to the direct Internet connections it provides to
companies, UUNet forms the infrastructure for The Microsoft Network and
provides the Internet connections for America Online and CompuServe.
Microsoft Corp. owns 13 percent of UUNet and has pledged its support to the
MFS acquisition.
As part of MFS, UUNet will be able to cut its costs for connecting to
local telephone service since that is the business MFS is in. Such costs
represent about 40 percent of UUNet's expenditures.
``Our cost of owning the facilities is much less than what UUNet
would be leasing them for from someone else,'' said Rick Weidinger, vice
president of Omaha, Neb.-based MFS. ``That's a pretty compelling economic
factor in this whole transaction.''
UUNet can also take advantage of MFS' 1,200-person sales force to
help sell its service and its deeper pockets to expand its technical
``MFS is a large company with access to capital that UUNet might not
have had on a standalone basis,'' said Stephanie Comfort, analyst at Morgan
Weidinger said MFS executives have been studying ways the company can
add Internet services since last summer.
Sidgmore said the merger should be complete by September.
Shareholders and regulators must approve first.
Only two technology industry deals are larger _ the $4 billion
takeover announced last week of StrataCom Inc. by Cisco Systems Inc. and
the $3.5 billion takeover of Lotus Development Corp. by IBM last June.
The combined MFS and UUNet will have 4,200 employees and two
divisions, each led by the current executives. Both companies were formed
in 1987.
UUNet went public last year and its stock rode the wave of investor
interest in Internet companies during the fall. Its shares traded above $90
in November.
They fell sharply in late February when AT&T announced it would
launch a consumer-oriented Internet access service. In speeches and
interviews since, UUNet executives have tried to change the perception they
would be hurt by AT&T.
Analysts said the stock drop in UUNet's price probably made the
company more attractive to MFS. But they also noted many Internet-related
stocks were overvalued earlier this year.
``The market had become so extremely speculative it needed only the
slightest spark for the entire sector to go down,'' said Ullas Naik,
analyst at First Albany Corp.