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Rivals gather to spoil BT bid

In August 1945, Emperor Hirohito broadcast to the starving, atom- bombed and defeated Japanese nation: "The war situation has developed not necessarily to Japan's advantage."

Showing a similar flair for understatement, BT last week admitted that its plan to enter the super league of multinationals by buying MCI of the US is in trouble. "It is difficult to predict whether the proposed merger will proceed as planned," said chairman Sir Iain Vallance, in a statement on Thursday, which also revealed BT's first quarterly loss since privatisation.

In fact, the only certain prediction is that the proposed merger will not proceed as planned. BT has become entangled in a three-sided takeover battle that reflects the ebb and flow of power in the global telecommunications business. BT's only consolation was Monday's Wall Street crash, which exposed the fragility of a rival bid for MCI, from an upstart company called WorldCom.

The story so far. A year ago, BT announced plans to take over MCI, a Washington-based company that sells long-distance calls to the American market. BT already owned 20 per cent of MCI's shares. In August this year, following a profits warning from MCI, BT reduced its bid by 15 per cent to $24bn (pounds 15bn) in cash and shares.

This was a mistake. At the start of October, WorldCom, which has grown from nothing to the US's fourth largest long-distance carrier in four years, stunned the City by offering $30bn, in shares, for MCI. Two weeks later GTE, a long-established US local telecommunications carrier, offered $28bn in cash.

What's this all about? The short answer is: fear. All established telecoms operators are in an uncomfortable position. Nearly every day they see new threats to the ability of their biggest asset, the copper or glass wires linking virtually every location in the world, to make money.

Some threats come from new technology - such as this month's announcement by Nortel and Norweb Communications of a means to transmit high-speed Internet services through electricity cables rather than phone lines.

Meanwhile, the world's first direct-satellite phone system, Motorola's Iridium, is due to go live next year, offering a totally wireless future, albeit in a niche market.

The immediate threat, however, comes from competition. BT's chief executive, Sir Peter Bonfield, last week admitted that BT is losing around 100,000 UK domestic customers each quarter to aggressive new cable companies. The good news is that all established telecommunications operators face similar threats. BT presents itself as the one that has made the most successful transition from monopoly to open competition. Certainly it has made a better attempt at it than the AT&T of the US, which allowed successive teams of management consultants to lead it through a series of U-turns at a cost of half a billion dol lars. BT is in a different league entirely to its counterparts in places like Germany, where the winds of liberalisation are only now starting to blow. BT executives find it galling that this track record is not taken seriously in the US. Brian Marshall, head of telecoms consulting at IT services giant Cap Gemini, says that the MCI tie-up was, if anything, counter-productive. BT was an old-fashioned tel ecoms company; MCI made its mark by aggressive marketing of capacity on other people's networks. "MCI is the complete opposite of BT." A credible US partner matters. The survival strategy for all established telecoms companies is to position themselves as single global suppliers capable of handling all the needs of the world's 5,000 multinational companies. Supplying multinationalshas lower profit margins than domestic callers, but the volumes are much larger - perhaps 30 per cent of global telecom profits, according to Salomon Brothers. Size matters for other reasons: many overheads do not cost much more for a large company than for a small one. This is the rationale behind partnerships such as Global One, which links France Telecom, Deutsche Telekom and Sprint of the US, and the rival Worldpartners consortium put together by AT&T. The combined weight of BT, MCI and other international players in a partnership called Concert would put it in the same league. BT insists that its bid is still going ahead, despite WorldCom's intervention. "It does not shoot our strategy totally inthe foot," Sir Peter said. BT's bid is the only one to have regulatory approval in the US, and BT expects the backing of MCI's board at an extraordinary general meeting in December. But Sir Peter admitted that anything could happen between then and now. WorldCom confirmed yesterday that it was still in the ring. BT has several options. One, - to cut and run - Sir Peter dismissed last week. "In our view, it's not the right decision at this time." The other is to negotiate some three-way partnership involving BT, MCI and either WorldCom or GTE. Sir Peter confirme d that talks had taken place last week. Culturally, BT would fit better with GTE than the upstart Worldcom. "They are in a different stage of growth," was Sir Peter's put-down. Others are more dismissive. "WorldCom are traders rather than telecoms operators," says Mr Marshall. "At some stage, they'll trade in the paper and retire." Finally, BT could spice up the original offer for MCI, either by raising its bid or by exploiting its special relationship with MCI. Apart from its 20 per cent shareholding in MCI, BT owns 75 per cent of the Concert joint venture. "We have significant ri ghts as a shareholder of MCI, so we have options and we are evaluating those options," Sir Peter said. A remaining option for BT is to look again at Cable & Wireless, the subject of abortive talks in 1996. C&W's strengths in the Asia-Pacific region would give BT real clout when the time comes to return to the US. BT is not going to let the embarrassment of a bungled MCI bid block its ambitions to be a global player. The consensus among market analysts is that the three-way deal will emerge. "BT is determined to stay in the US," said John Clarke of Daiwa Research. "I believe BT would like to end up with equity ownership in whatever larger vehicle emerges." He said GTE, with its roots in local telephony, would be a far more natural partner th an WorldCom, and described the cut-and-run option as "short-termism of the worst sort". But if BT has a single corporate personality, it is that of a control freak: it likes to be in charge. The battle for MCI is likely to turn bitter over the next few weeks. Sir Peter has one piece of advice to market-watchers: "Stand back, look at all the players in the world and look at all the possible combinations. It's going to be one of those."