Déjà Vu All Over Again
Overland Park may soon hear a giant sucking sound: Sprint going the way of Hoechst Marion Roussel.
Sprint was the hometown phone company, a Fortune 500 big business that showered the town with charity fundraising sponsorships and lent its weight to such civic projects as restoring Union Station. Sprint employees were all around us, the good guys, building a billion dollar headquarters in Overland Park, spreading the joys of a wireless network and the pristine clarity of fiber optics. And when the big boss spoke, Kansas City believed him.
“We don’t believe that a company can master the changes propelling our industry simply by increasing scale,” Sprint CEO William T. Esrey said in the company’s 1998 annual report. “We would rather lead than be large.”
Throughout its history, Sprint never came across as a big, lumbering phone-company behemoth, clubfooted and content with protectionist regulation. It was a little company that started in Abilene, Kansas, back in 1899 and became part of the Kansas City community in 1966. Sprint made its mark by laying the nation’s first digital, fiber-optic network, announced in 1984 and completed by 1986. In 1995, Sprint won the rights to Personal Communications Service (PCS) licenses nationwide, bragging that it could ensure the first coast-to-coast telecommunications route for voice, data, image, and video without interruption even if a cable was cut or an electronics failure occurred. Wireless communication was here for the masses.
Against that backdrop, Sprint meant innovation, risk-taking, and creativity — plus smartness, signaled by the use of baby-boomer heartthrob Candice Bergen in its “pin-drop” TV commercials, which turned Sprint into a household name.
But not long after Esrey made his PR spiel about how the company would rather “lead than be large,” it appeared Sprint was being led … for stockholders’ benefit and in the name of technological necessity. When the merger with WorldCom was announced in October 1999, Kansas City was stunned — but in a sympathetic way, as if Sprint were just behaving oddly while under the influence of some powerful foreign attraction.
WorldCom chief Bernie Ebbers wanted a $129 billion deal with Sprint. He needed Sprint. WorldCom stock had languished through most of 1999, and Ebbers was a servant to his stockholders.
Sprint hadn’t been “shopping itself”; instead, the impetus for the merger came from outside the company because of Sprint’s assets, mainly its wireless PCS network, says Dr. Peter Eaton, director for the Center for Economic Information at the University of Missouri-Kansas City. Though it was number three in the telecommunications world ($20 billion in revenues for 1999), Sprint had a big corporate footprint in the wireless field (number five, with 6.7 million PCS subscribers) and WorldCom didn’t.
As for WorldCom: A few days after the merger was announced, The New York Times called Ebbers an “unknown,” noting that WorldCom had grown by buying some 40 companies and that Ebbers needed time to “learn to run what he had built.”
From the sidelines, it all smelled of money. For Esrey, other senior executives, upper management, and plenty of other Sprint stockholders, including institutional investors such as mutual funds, pension funds, and 401(k) plans, it meant an opportunity to cash out or increase the value of the portfolio.
“It’s driven by selfishness,” says Eaton. “That’s the way it’s supposed to work: a market-driven system where you obey the signals of the market.”
The market might have been happy, but Overland Park sat on the sidelines, like a water boy watching the big game, holding a bag of tax-incentive giveaways and embracing a naive belief that a global corporation would jot down the city on its “things to consider before merging” list.
Overland Park had courted Sprint since the early 1990s. Finally, in 1997, the city thought it had the knot tied. The city council authorized $1 billion in economic development revenue bonds (later raising it to $1.4 billion) for construction of the Sprint Corporation’s 265-acre World Headquarters Campus. There were other goodies as well: a 50 percent break in personal property taxes, a 10-year property tax break amounting to $113 million, and sales tax exemptions of nearly $43 million.
“I think it was a good deal. Very smart. A no-brainer,” says Dennis McKee, president of the privately run County Economic Research Institute (CERI).
Overland Park City Councilman Mike Lally might agree with the no-brainer part, but not as a compliment. “To have a company with this incredible success to ask us to use the city as a bank is outrageous,” he says.
But Lally didn’t press the point on the council. He says he’s “not a total purist” when it comes to opposing tax breaks for development. “I see a need in areas that need redevelopment.” Not unexpectedly, since Lally represents the older, northern part of Overland Park, supporting taxpayer subsidies for the high-end 119th Street corridor, where the Sprint campus is located, isn’t in his playbook.
In a perfect world, the Overland Park/Sprint economic development playbook wouldn’t change. The predictions CERI made a year ago would come true: By 2003 annual operations of the Sprint campus would generate more than “$6 billion in industry output throughout every sector of the Johnson County economy.” Because of Sprint, more than 51,000 jobs would be created or retained, bringing $1.4 billion in annual earnings to Johnson County households.
But merger prospects stopped the game. The company halted construction of the 20-building, 16,000-employee, 3 million-plus square-foot campus; it would finish only those 12 buildings where work had already started. The Sprint campus would no longer be a world headquarters. The corporation’s priority, set out in the merger proxy given to Sprint stockholders, was to complete the merger, to provide stockholders with “superior long-term returns,” and to “enhance stockholder value.”
With that, CERI’s economic forecast became yesterday’s box scores. And it remains so even as the federal government erects some high regulatory barricades around which Sprint and WorldCom must strategize. The pause brings on a possible European player in Deutsche Telekom, headquartered in Bonn, Germany.
As economists and businesspeople worldwide ponder the next development in Sprint’s coming corporate disappearance, some Overland Park officials retain their water-carrier status with no other choice, it seems to them, but to treat the coming changes casually.
CERI’s McKee says his organization plans no “scenario analysis” or economic studies of what might happen to Overland Park in the event of a Sprint merger or buyout. “No one has the remotest idea (what will happen),” he adds. “The only impact we really know is the multiplier effect on employment.”
McKee embraces what appears to be the same optimistic outlook that’s blanketing Overland Park City Hall. “I can’t see Sprint going away in Overland Park or Kansas City,” he says.
Overland Park Mayor Ed Eilert shares that view. Eilert is reportedly the city’s point man in its communications with Sprint. Even so, he says, “I don’t know. I have no particular insight in Sprint’s decision-making on their board.” Eilert refuses to deal in what-ifs, and he doesn’t think the city needs to commission a new economic impact study concerning Sprint. “There’s nothing of value to be gained by engaging in speculation,” he says.
But Dr. Norman Clifford, director of Forecasting and Research at the University of Kansas’ Institute for Public Policy and Business Research, doesn’t put a laissez-faire shine on the coming changes. He thinks Overland Park “needs to prepare for the economic consequences” of a shrunken Sprint presence and to investigate the legal ramifications associated with all those tax incentives. The promises and assurances need to be reviewed, Clifford says. “No doubt particular financial arrangements can have consequences.”
Lally agrees that the city-authorized tax incentives will be passed along to whatever entity ends up controlling Sprint — “but Sprint as we know it won’t be there.” Lally criticizes the economic development process in Overland Park, saying although the city puts some “high thresholds” on companies seeking tax incentives, the Overland Park Economic Development Council has helped grease the skids for their approval by the time any proposal hits the city council. He wants the council to play hardball instead of being “nurturing.” But he’s in the minority even while he calls his council counterparts “patsies” when it comes to negotiating with businesses that want tax breaks.
Eilert dismisses such criticism and applauds Sprint and WorldCom executives for putting most concerns associated with a merger to rest. Though he admits to the present uncertainty, he’s confident the county’s skilled employee base and the state-of-the-art technology applied at the Sprint campus will mean a strong corporate telecommunications presence on 119th Street.
But what will happen to Sprint is more than just a name change. For a reality check, perhaps Eilert should review what happened to homegrown Marion Laboratories.
Founded by a beloved Ewing Kauffman in 1950, Marion Labs went through a series of mergers and buyouts, eventually losing not only the Marion name but also a meaningful corporate presence in Kansas City. In 1989, Marion Labs merged with Merrell Dow to become Marion Merrell Dow; in 1995 Marion Merrell Dow was acquired by Hoechst AG of Frankfurt, Germany, and with the integration of Marion and its previously acquired Roussel-Uclaf and Hoechst Pharma, the company became Hoechst Marion Roussel. At the end of last year, Hoechst merged with Rhone-Poulenc of France to become Aventis, a so-called life sciences conglomerate, with its headquarters in Strasbourg, France.
Weeks later Aventis announced it would relocate 900 executive, administrative, finance, marketing, human resources, and other support-function jobs to “Pharma Row” in Bridgewater, New Jersey. City officials, Chamber of Commerce execs, and economic development specialists fought to keep a large Aventis presence in Kansas City, Missouri. And while it may have been a case of being too late, it wasn’t one of being too little.
Kansas City gave its typical generous tax-break handouts first to Marion Merrell Dow; later it saw them passed along to Hoechst. In 1992, the city created the Hickman Mills TIF (Tax Increment Financing) District for infrastructure upgrades and construction of a high-tech park along Hickman Mills Drive. Construction of a corporate headquarters campus was announced in 1994. When Hoechst took over a year later, TIF was part of the deal. Over the 23-year period of the TIF authorization, Hoechst could collect $20 million to put into the $55.2 million project.
None of that mattered to Aventis; nor did the company appear to care that it could save a lot of money by staying in Kansas City or that it could get more tax breaks just for the asking — and the promise to not to leave. Likewise, arguments about a highly skilled and motivated workforce and a new high-tech facility meant little. An international, overseas-grown corporation does not keep its headquarters, or its top executives, in a Midwestern town Europeans — like much of the population of the United States — imagine has all the character of a soybean field.
“You do the best you can when you deal with global companies,” says Barb Engel, executive director of the South Kansas City Chamber of Commerce. “It’s out of your control.”
And as if to prove we are bumpkins, failing to learn from our mistakes, when Quintiles, a North Carolina drug-testing firm, made noises about spending $93 million to buy a chunk of Hoechst, we offered even more tax giveaways. For a promise to keep 500 jobs in Kansas City and add 500 more, Quintiles got tax breaks worth almost $11 million at the Hickman Mills site.
Right now, out on Hickman Mills Drive, in a tax-break haven, there’s a high-tech park nicely landscaped with trees and a corporate headquarters campus, including a nine-story tower, containing 450,000 square feet of vacant space.
“It’s very distressing,” says Engel. “It’s an excellent facility that needs to be marketed properly.”
UMKC’s Eaton says the same abandonment could happen in Overland Park. “Yep, no question. That’s a possibility and closer to the realm of being a possibility the more (there’s) talk of an European buyer.”
“The parallels are uncanny,” Engel says, adding that Overland Park needs a “Plan B” when it comes to the Sprint campus. “(They’re) faced with doing something different with that campus,” Engel says. “That’s life, but coming from a hometown standpoint, it’s grievous.
“Sprint is gonna go away. You just watch.”
And if Deutsche Telekom is the victor, it will be far, far away.