Wednesday, September 6, 2000

WorldCom Corp. agreed yesterday to buy Intermedia Communications Inc. in a $6 billion deal that also gives it a controlling interest in Beltsville, Md.-based Digex Inc.

Digex, the company founded by local technology guru Douglas Humphrey in 1991, is a leading Web-hosting firm that Tampa, Fla.-based Intermedia bought for $150 million in June 1997.

Jackson, Miss.-based WorldCom, the nation’s second-largest long-distance carrier, will pay $3 billion in cash and stock and assume another $3 billion in Intermedia debt in return for Intermedia and a 55 percent share of Digex.

Digex was the hot commodity WorldCom was after.

“WorldCom made it clear they bought Intermedia because of Digex,” said John Hodulik, Internet infrastructure analyst at New York-based investment bank PaineWebber Inc.

Acquiring Digex gets telecommunications giant WorldCom deeper into the Web-hosting arena the business of outsourcing your corporate Web site so it sits on another company’s server. It is a $3 billion market that is expected to grow to $25 billion by 2004, Mr. Hodulik said.

“This is a good deal, both for Digex and WorldCom,” said Jeanne Schaff, senior telecommunications analyst at Forrester Research, a Cambridge, Mass.-based technology research firm.

Digex is among the top six Web-hosting firms, Ms. Schaff said.

WorldCom already markets Web-hosting services through its ownership of UUNet Technologies Inc., the Loudoun County, Va., company WorldCom acquired in 1997.

But Digex provides more sophisticated Web-hosting services by also providing companies with software over the Internet and monitoring networks.

Digex will remain independent of UUNet, which also operates an Internet backbone that carries data.

“Acquiring Digex is significant not because of the size, but because of its strategic direction for WorldCom,” WorldCom President Bernard Ebbers said in a conference call with reporters yesterday.

Mr. Ebbers said buying Digex speeds up by 12 to 18 months WorldCom’s ability to provide Web- and application-hosting services, one of the highest growth markets in the industry.

Digex chief executive Mark Shull said the purchase helps the local company by giving it access to WorldCom’s customers, its 70,000-mile fiber-optic network and its data centers. Digex has three data centers warehouses that store servers that hold information and WorldCom has 15 through its investment in UUNet and 15 that it owns itself. WorldCom plans to add 2 million square feet of storage space by building new data centers, Mr. Ebbers said.

“Having the backing of someone like WorldCom is tremendous,” Mr. Shull said.

Digex has 1,100 employees, and its work force is likely to grow after WorldCom’s investment, Mr. Shull said.

“It’s fair to say it will grow,” he said.

The boards of directors of WorldCom and Intermedia approved the transaction Friday, but the deal is subject to the approval of shareholders and federal regulators and is expected to close early next year.

Intermedia, which markets telephone and Internet service, hired Bear, Stearns & Co. in July find a buyer for Digex so it could focus on the telecommunications business.

Some shareholders may be angry with the deal, said Mr. Hodulik, who downgraded Digex’s stock yesterday.

“The deal makes strategic sense for Intermedia and certainly for WorldCom and Digex, but the way I look at it, Digex shareholders get no value out of the deal,” he said.

That’s because WorldCom purchased only Intermedia’s shares of Digex, not all of the company’s outstanding stock.

Shares of Digex fell $16.63, or 20 percent, yesterday to close at $67.88 a share on the Nasdaq stock market. Digex reported 1999 revenue of $59.8 million. In July, it reported second-quarter revenue of $42.2 million and a net loss of $18.9 million.

Shares of WorldCom also fell on the Nasdaq stock market, down $3.19, or 8.6 percent, to close at $33.75 a share.

Shares of Intermedia rose $8.61, or 27 percent, closing at $31.48 a share on the Nasdaq stock market.

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