Will WorldCom’s Woes Engulf UUNet?

Holding
court yesterday with reporters
after a terrible week for his company,
WorldCom CEO John Sidgmore made clear the company was
too big to fail. Exhibit No. 1: its UUNet subsidiary, an Internet backbone
provider that routes over half of the world’s e-mail messages.

While admitting a WorldCom bankruptcy is a real possibility, Sidgmore vowed
UUNet would remain steady.

“I honestly don’t think that under any of the scenarios under discussion
there’d be a blip in the level of the service,” he said. “I don’t see any
chance of the UUNet network going dark, under any circumstances.”

Founded in 1987, Fairfax, Va.-based UUNet holds the distinction of being the
first commercial Internet service provider (ISP). Its Internet network
currently spans more than 2,500 PoPs in North America, Europe and Asia,
boasting over 1.6 million modem ports. As the largest backbone provider to
ISPs of all sizes, including AOL and EarthLink, UUNet is key to the
Internet’s inner workings. However, with the telecom industry’s long
instability, ISPs have hedged their risks with multiple backbone providers,
analysts said.

“It’s fair to point out to that the big bandwidth providers have hedged
their bets really well,” said Seth Libby, an analyst with Yankee Group.

Libby said, despite WorldCom’s peril, UUNet would remain the undisputed
backbone leader, with an impressive record of delivering high-quality
services.

“UUNet’s customers will continue to stay with UUNet,” he said. “I don’t
think there will be an interruption of service to existing customers.”

Sidgmore, who took the CEO reins two months ago from longtime
WorldCom chief executive Bernie Ebbers
, knows UUNet quite well. From
1994 until 1997, he headed UUNet, building it into the world’s largest
Internet provider with an annual revenue base of $300 million. During its
acquisitions binge, WorldCom acquired UUNet through its $12.5 billion deal
in 1996 for MFS Communications, which had bought UUNet for $2 billion months
earlier. (IDT Corp.’s reported $4 billion bid today for WorldCom’s MFS unit would not
include UUNet.)

“My opinion is that being from UUNet he would work very hard to preserve
it,” said Giga Information Group analyst Lisa Pierce. “But none of us know
what the bankers have in mind.”

Pierce and other telecom watchers said bankruptcy would not be a
catastrophic situation for UUNet, since the industry is littered with
bankrupted companies, from Global Crossing to Williams Communications to XO
Communications.

“If you’re the first kid on the block with a Mohawk, you might be a little
nervous,” said Probe Research Chief Operating Officer Allan Tumolillo. “But
if everyone has a Mohawk, you’re OK.”

However, analysts warn the instability at WorldCom could spill over to
UUNet. WorldCom has already announced 17,000 layoffs, and Sidgmore said
market conditions could lead to more cuts, although none were planned.

“The concern is more slippages in network service and customer support,”
Pierce said. “Those are reasonable concerns. Can you imagine cutting 20,000
people and not impacting service?”

Tumolillo echoed those concerns, adding that bankruptcy, depending on how
WorldCom would file it, could present its own set of complications, making
expenditures for network upgrades susceptible to a judge’s approval.

While Sidgmore picks through the 75 acquisitions WorldCom made during the
heady days of the late 90s for the ones with the most value, UUNet would be
one of WorldCom’s most attractive assets, analysts said.

“UUNet stands out as one of the jewels in its crown,” Libby said.

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