Phone, Internet Firms Plan $2-Billion Merger

In the first acquisition by a sizable local phone company of a major Internet access provider, MFS Communications Co. said Tuesday that it has agreed to pay $2 billion for Uunet Technologies Inc.

The planned purchase by upstart phone carrier MFS, based in Omaha, will broaden the market for advanced telephone and Internet services targeted at large businesses. It is the latest in the wave of mergers and alliances unleashed in February when Congress enacted a sweeping telecommunications reform bill aimed at spurring competition in broadcasting, cable TV and local and long-distance telephone service.

Uunet, a Fairfax, Va.-based company that is 13%-owned by Microsoft Corp., built much of the fledgling Microsoft Network and has also constructed Internet and computer network links for America Online, AT&T; Corp. and scores of other businesses.

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. And 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% of Uunet’s expenditures.

“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.”

Until Tuesday’s announcement, most major Internet access providers had stayed on the sidelines of the merger frenzy. The nation’s two other publicly owned Internet access providers--Netcom On-Line Communications and PSInet Inc.--have staunchly maintained their independence, preferring to exploit their ability to move quickly in a fast-changing field rather than partner with larger and more bureaucratic telecommunications giants.

But after being approached by MFS, Uunet officials said they found the advantages of combining forces with a larger company were too compelling to ignore.

“We see this merger as a natural evolution of our Internet vision,” Sidgmore said. “We view MFS as having the premier network infrastructure required to complement our entire range of services.”

Analysts praised the deal, as did investors. Uunet shares soared $10.50 to $58.75 on Nasdaq, while MFS added 6.25 cents to $34.69, after initially falling as low as $32.25.

Stocks of similarly sized companies that also provide Internet access rose as investors speculated they might also be takeover targets. For instance, Netcom went up $3.375 to $35.875 and PSInet jumped $2.375 to $14.125.

“This deal makes a lot of sense because the Internet is the future of . . . our communications,” said Gene DeRose, president of the New York research firm Jupiter Communications. The Internet, DeRose added, “is becoming a worldwide phenomenon that particularly benefits large multinational corporations” with global communications needs.

It is unclear, however, whether the planned acquisition may spark similar moves by other telephone companies.

The two companies differ from most of their rivals in that they specialize in serving business customers rather than the broader consumer market. 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.

“I don’t think this one transaction can be extrapolated to the entire industry; I think this transaction will initially have an impact [only] on business users,” said Jonathan Cohen, a telecommunications analyst for Smith Barney Inc. But whether the deal will have a broader impact can’t yet be determined, he said.

“I have no doubt that there will be strong sustainable businesses stemming from the Internet,” Cohen said. “But who dominates remains to be seen.”

Under terms of the agreement, each share of Uunet stock would be converted into 1.78 shares of MFS common stock, on the basis of a 2-for-1 split of MFS stock effective April 27.

Microsoft, which would see its 13% stake in Uunet transformed into a 4% interest in MFS, gave the transaction its blessing.

The combined MFS and Uunet would have 4,200 employees and two divisions, each led by the current executives. Both companies were formed in 1987.

Uunet chief Sidgmore said the merger should be complete by September. Shareholders and regulators must approve it 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 International Business Machines Corp. last June.

Associated Press contributed to this report.

* MARKET BEAT

Uunet followed an unusual path for a new stock offer. D3