LDDS-Metro Communications, Inc.

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LDDS-Metro Communications, Inc.

Lefleur’s Bluff Tower
4780 1-55 North, Suite 500
Jackson, MS 39211
U.S.A.
(601) 364-7000
Fax: (601) 360-8533

Public Company
Incorporated: 1989 as LDDS Communications, Inc.
Employees: 1,000
Sales: $801 million
Stock Exchanges: NASDAQ
SICs: 4813 Telephone Communications, except Radio

LDDS-Metro Communications is America’s fourth-largest telephone company, behind AT&T, MCI Communications Corp., and United Telecommunications Inc.’s Sprint. The long-distance provider emerged from a massive pack of third-tier telephone companies through a strategy of acquisitions in the late 1980s and early 1990s.

LDDS provides long-distance service to small- to medium-sized business and commercial customers. The company’s profitability depends on its ability to realize line costs per minute that are less than revenues per minute. Line costs per minute include two elements, access charges and transport charges. Access charges are the costs that local exchange carriers (LECs), commonly known as “Baby Bells,” impose for the privilege of originating and terminating calls. They constitute the bulk of LDDS’s line costs. The remainder, in the form of transport charges, include the cost of transmitting calls between or within local access transport areas (LATAs).

Long Distance Discount Services, Inc. was formed in 1983 in Hattiesburg, Mississippi, when the breakup of AT&T enabled thousands of competitors to start reselling long-distance telephone service to individual and business customers. Bill Fields convinced several investors to lease a local Bell system Wide-Area Telecommunications Service (WATS) line and resell time on the line to businesses. Long-distance resellers like LDDS bought time from regional Bell companies in volume and sold it, often at a discount, to business customers. LDDS owned the switches, or nodes, of its network, and leased the lines from local providers. The sophisticated long-distance technology was designed to handle a high volume of calls. Some observers compared the long-distance telephone industry to the airline industry: there was a fixed cost for getting calls or seats from one place to another, and the more customers a telecommunications company or airline had, the lower its costs would be. Price competition among these companies was ruthless. Assuming that the “Baby Bells” would continue to lease the lines at a fixed rate, Fields signed up 200 customers. But when Bell started raising the charges for the use of the lines, LDDS began to lose money.

By the early months of 1985, the fledgling business was losing $25,000 each month. It became clear to Fields that he was failing at the day-to-day management of LDDS, and he first tried to sell the company. Later in 1985, several owners signed LDDS over to Bernard Ebbers, one of the initial investors. By the time Ebbers became president and chief executive officer, LDDS was $1.5 million in debt.

Ebbers was a Canadian who came to the United States on a basketball scholarship to Mississippi College. After graduation he became a high school baseball coach. He later worked in the garment trade as a distributor, but lost interest in the low-margin industry. Ebbers seized the chance to buy a 40-room motel in Columbia, Mississippi, in the 1970s, borrowing the necessary money to establish himself in the business. In the real estate market of the late 1970s, the value of prime properties could double over the course of five years. Ebbers parlayed his one hotel into 12 by the early 1980s, garnering healthy operating and asset gains.

As head of LDDS, Ebbers worked to control costs. He kept overhead low with lean operations and unpretentious offices. The streamlined LDDS brought on new clients with a claim of customer service that larger long-distance companies could not offer. LDDS did not use telemarketing to solicit new business, but mobilized a direct sales force to make personal contacts. After the initial face-to-face solicitation, LDDS made monthly, and sometimes weekly, office calls to ensure that the customers’ service was satisfactory. The company provided an alternative to the major long-distance carriers’ across-the-board packages by tailoring service to each customer’s calling patterns, which simultaneously maximized routing efficiency and cut costs. The major long-distance carriers at this time were also exerting a great deal of effort to secure big-ticket clients; LDDS was able to take advantage of this by concentrating on small business customers who were falling through the cracks.

Within six months of Ebbers’ move into the driver’s seat, the company had moved into the black. In 1986 revenue rose to $8.6 million, and a year later, sales had grown to $18 million. By 1988 annual revenues had skyrocketed to $95 million. Consolidation and acquisitions were the principal factors that enabled LDDS to accomplish this rapid growth during the last five years of the 1980s. The company leveraged its assets in order to buy other third-tier long-distance companies, including: Telesphere Network, Inc. (1987); Com-Link 21, Inc. (1988); Com-Link 21, Inc. of Tennessee (1988); Telephone Management Corporation (1988); and Inter-Comm Telephone, Inc. (1989). The acquisitions cost the company a total of $34.87 million, but expanded LDDS’s geographic network to include Missouri, Tennessee, Arkansas, Indiana, Kansas, Kentucky, Texas, and Alabama.

Each company LDDS assumed control of performed better after acquisition. Part of the success was attributed to the LDDS standards of customer service, but the economies of scale gained when more companies came on line also brought higher profitability. LDDS applied its customer service ideals to new acquisitions through a decentralized system wherein each state office set its own sales goals. Companies in the system formulated their own marketing strategies in response to local market conditions.

LDDS’s annual earnings grew from $641,000 in 1986 to more than $4.5 million in 1989. That same year the company merged with 17-year-old, Nashville-based, Advantage Company, a public company that was losing money when the two consolidated. The merger benefited both companies—it enabled LDDS to reduce its debt and finance future purchases through stock offers, and it brought Advantage into profitability. By the end of that year, LDDS’ revenue-per-employee stood at $360,000, more than double the industry average, and triple that of some of LDDS’s higher-priced competitors. LDDS also pursued other avenues to spur growth. Its 14 percent annual internal growth rate was fueled by thorough infiltration of its growing markets.

Despite the economic downturn of the early 1990s, LDDS continued its upward climb. The long-distance telephone business was not adversely affected by the economic climate, as the telephone had long since established itself as an indispensable part of the business world. In fact, LDDS made two acquisitions that year, purchasing Mercury, Inc., for $10.3 million and TeleMarketing Corporation of Louisiana for $15.5 million. Despite the recession, LDDS’ 1990 profit was $9.8 million, ten times its 1986 total. Sales had grown sixteenfold in that same time span.

LDDS made three acquisitions in 1991, using cash, stock, and bank debt to finance purchases that totaled $90 million. National Telecommunications of Austin was purchased with a combination of $27 million in cash and stock. The acquisition of Phone America of Carolina established an LDDS presence in North and South Carolina and eastern Tennessee. These two companies had combined annual revenues of $51 million. LDDS also made its largest acquisition up to that time with the purchase of MidAmerican Communications Corporation. MidAmerican provided long-distance service to Nebraska, Missouri, Kansas, Illinois, Wisconsin, North Dakota, Minnesota, Colorado, New Mexico, and Arizona. The acquisitions enabled LDDS to increase its sales by 71 percent over 1990 to $263.41 million.

Between 1983 and 1991, LDDS spent more than $200 million to purchase about 24 smaller companies. The additions brought the LDDS network to 27 states, a system that excluded only the Northeast and Northwest. The downside of all this growth was that it left the company with $165 million in long-term debt, and a negative net worth.

At about the same time, AT&T started trying aggressively to win back customers of all sizes. Despite its dramatic success, LDDS and other third-tier long-distance companies had only captured about one percent of the total long-distance market at this point. In the 1990s the big three telecommunications companies aimed for the small- and medium-sized businesses they had previously neglected.

LDDS did not stand idly by, however, In 1992 LDDS acquired Shared Use Network systems, Inc.; Automated Communications, Inc.; Prime Telecommunications Corporation; TFN Group Communications, Inc.; and Telemarketing Investments, Ltd. These companies, combined, expanded LDDS service in Arizona, Florida, Iowa, Nebraska, Nevada, New Mexico, New York, Ohio, Utah, Virginia, and West Virginia. The new affiliates filled in LDDS’s service network and brought a total of $66 million in annual revenues. But a much more important development for the company in 1992 was its merger with Advanced Telecommunications Corporation. The Atlanta-based company had $350 million in annual sales spread over a network of 26 southern states. The merger increased LDDS’s annual revenues by 30 percent to $801 million in 1992. Although merger-related expenses caused LDDS to take a loss of $8 million for the year, the company expected to realize significant cost savings, increased opportunities for acquisitions, and a wider variety of products with the consolidation. Cost savings were achieved through LDDS’s ever-enlarging networks, which produced a situation where a larger percentage of the company’s calls originated and terminated within its service area. Therefore, more calls stayed on the network of low-cost transmission facilities that were owned or leased by LDDS. And, of course, increased volume lowered the per-minute costs.

LDDS has dodged rumors and predictions of imminent takeover almost since its inception; in an effort to put to rest such speculation, in 1993 the company announced an agreement to merge with Metromedia Communications Corporation (MCC) of East Rutherford, New Jersey, and Resurgens Communications Group, Inc. of Atlanta. The agreement stipulated that LDDS shareholders would collect about 68.5 percent of the fully diluted equity of the combined company, while MCC and Resurgens shareholders secured the remainder. LDDS issued 19 million new common shares in conjunction with the merger and made a private placement of $50 million in convertible preferred stock.

The merger extended LDDS’s network to include all 48 mainland states, and company executives projected that the new entity, renamed LDDS-Metro Communications, Inc., would achieve annual revenues of $1.5 million in 1993. LDDS moved into a new headquarters in Jackson, Mississippi, in May 1993. The company planned to continue its growth strategy of strong internal progress and selective acquisition and consolidation of other third-tier telecommunications companies.

Principal Subsidiaries

Long Distance Discount Services, Inc.; Com-Link-21 Inc.; Corn-Link 21 Inc. of Tennessee; Telephone Management Corp.; Inter-Com Telephone, Inc.; Advantage Companies, Inc.; National Telecommunications of Austin; TeleMarketing Corporation of Louisiana; Prime Telecommunications Corp.