Investors pound Sprint stock as executives scramble to define future

Ted Sickinger and Eric Palmer

Monday, July 31, 2000 | 11:06 a.m.

When Sprint Corp. Chief Executive William T. Esrey recently sought to reassure employees that "Sprint is not for sale," he briefly donned a red baseball cap emblazoned with the slogan: "Mapping the Future."

It wasn't clear whether the slogan was coined especially for the event, or for the transition in the failed merger attempt with WorldCom Inc. But the implication was clear.

Sprint, the dominant local phone company in Las Vegas, needs a new plan, and it needs one fast.

Arguments that regulators rejected in suing to block the Sprint-WorldCom deal -- that the two needed to merge to compete -- were swallowed whole on Wall Street. And with prospects fading that another company will step in quickly to buy Sprint, investors are pounding the company's stock.

Sprint's FON stock has plummeted to its lowest level in 18 months, well below what it traded at before its merger announcement, and less than half what WorldCom offered. The shares closed Friday at $34.81, down 44 cents.

The company's flagship long-distance business, under attack from new competitors and new technologies, is seeing its growth and profitability wither. Sprint's earnings are under pressure from as-yet unprofitable investments in wireless, broadband and Internet businesses.

Esrey has outlined a bare-bones strategy for Sprint, but it sounds a lot like his old "go it alone" strategy.

Sprint, he said when the merger was abandoned, will adopt a laserlike focus on high-growth areas of the business such as wireless, Internet and broadband data services, and increase revenue 20 percent a year.

Experts say that strategy is all well and good, but some contend it will lead nowhere but back to the bargaining table and another merger.

With two competing themes at work in the industry -- one to get bigger and broader, the other to specialize -- Sprint may be caught in the middle.

On its own, the Westwood company may not be big enough to compete over the long haul with the emerging behemoths of the communications industry. On the other hand, it may be too big to take on more nimble start-ups that are concentrating on specific market niches and emerging technologies.

"I am quite sympathetic with Bill Esrey and Sprint," said Reed Hundt, who was chairman of the Federal Communications Commission during the writing of the 1996 Telecommunications Act, which set competitive forces loose in the industry.

"Sprint is No. 3 in a long-distance business that is an artifact of history, and one of a bunch of wireless competitors. It needs deeper pockets and international scale. He can remake the company, but it is a big challenge."

The frenzy of telecom consolidation is being driven by the notion that it's no longer enough to provide just local, or just long-distance, service. Carriers need to offer the whole package - local, long-distance, Internet, data and wireless services.

The risk faced by traditional, single-service carriers is that "once anybody has everything, everybody needs everything," said Tod Jacobs, an industry analyst now with J.P. Morgan who testified before Congress in the wake of the Sprint-WorldCom merger announcement.

As carriers offer multiple services over integrated pipes, they save on network and marketing costs, creating the opportunity for further discounting for consumers.

So the rush is on to get big and broad fast. Examples include AT&T's purchase of cable giants TCI and MediaOne; SBC Communication's purchase of fellow local monopolies Pacific Telesis, Ameritech and SNET; and Deutsche Telekom's offer to purchase VoiceStream.

Unlike AT&T, WorldCom and SBC, Sprint has no local connections to businesses and consumers in most cities.

Esrey said his company can lease fiberoptic rings to reach businesses in most cities, and put its own equipment into Bell company wire centers in selected markets to target high-value residential customers with integrated voice and data service.

Sprint has tried that strategy once, however.

One rationale for the WorldCom deal, Esrey told Congress, was that "it became clear to us at Sprint that our future should no longer hinge on a plan that depended upon cable companies or Bell companies to reach our customers."

But the new strategy does just that, leaving Sprint dependent on third parties for the reliability and availability of its last-mile connections to customers, potentially with higher costs than competitors who own the underlying networks.

"You can use leasing strategically," said Mel Marten, an analyst with Edward Jones in St. Louis. "But pretty much everyone who has tried that for a major part of their business ends up buying. It's the only way to control the quality of the service and drive down costs."

Sprint also lacks international reach to serve multinational corporations. Such businesses are flagship accounts, and they increasingly look to one carrier to provide seamless, end-to-end service around the globe, and be accountable for quality of service all along the way.

Sprint could go out and buy one of the parts it doesn't have.

But the company's depressed stock is not valuable currency to use in an acquisition, so any big buyout would lead to further dilution of its earnings.

Meanwhile, the company faces increasing competition, lower prices and slower growth in the long-distance business, which is responsible for almost half its revenue.

Consumer long-distance is a dying business, Esrey says. And the segment's attractiveness will fade further as the regional Bell companies get permission to offer long-distance and more customers turn to the Internet for free or minimal cost service.

Many carriers are acknowledging that the parts of their business are worth more than the whole by spinning off slow-growth divisions or issuing tracking stocks for others.

If Esrey is truly interested in maximizing the company's value for shareholders, some experts say, pressure may build to break it up and sell the parts to competitors.

In the meantime, with investors paying for growth businesses, Sprint could choose to spin off its slow-growth consumer long-distance business. Indeed, WorldCom announced Thursday that it is considering such a plan.

But long-distance still pays the freight at Sprint, and Wall Street might get nervous about the effect on revenue and cash flow.

"Pulling yourself out of the consumer market and concentrating on the high-end business market may be a wonderful plan," said Bob Rosenberg of Insight Research. "But Wall Street would shoot you right now for trying to do it."

Some analysts contend there is a major change coming that will favor companies that become either retailers or wholesalers. They see Sprint as a prime retail specialist that could buy the connections it doesn't have from a wholesaler.

"We used to be big on integrated carriers, but in the last six to eight months our perception has changed," said Steve Kamman, an analyst with CIBC World Markets. "The thing to stress for WorldCom and AT&T and Sprint is they have very valuable customers."

WorldCom's decision to get out of consumer long-distance and serve business clients exclusively is a move in that direction, Kamman said.

CIBC sees parallels to computing in the late 1980s, when desktop computer power doubled and prices dropped every 12 months, exploding demand for computer use. CIBC thinks the same thing will happen with demand for broadband services as companies continue upgrading optical fiber lines, throttling up speed and power, and pushing down prices.

In the face of such rapid speed and price changes, Kamman said, the big telecom firms will have to decide whether to "focus on economies of scale or economies of scope."

Hundt, the former FCC chairman, doesn't buy it. He thinks large international players will rule the industry.

A combined Sprint and WorldCom could have been one of those players, Hundt said. He thinks there is going to be regret in regulatory agencies that the merger was opposed when they see how the market develops.

Going forward, "the market is regrettably hazy for Sprint," Hundt said.

Esrey said he's heard such dire forecasts since he took over as chief executive of Sprint 15 years ago. All along, he said, the company has competed, grown and delivered big returns for shareholders.

But as Esrey returns to the course he was on before the merger was announced, outside skepticism of that strategy may have reached a new peak.

"It's very much up in the air right now," said Marten, the analyst with Edward Jones. "They certainly have the ability and assets to perform for the next year or two, but beyond that you really have to see some new strategy. It probably involves a merger."

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