MCI up for grabs

MCI Corp. officials Wednesday evening confirmed reports that GTE Corp. made an unsolicited $25 billion cash offer for all outstanding shares of the telecommunications firm.

In its official statement, MCI said its board of directors "will meet shortly" to review and discuss the GTE bid, as well as a previous bid from WorldCom Inc.

Last week, acquisition-happy WorldCom offered $33.5 billion's worth of common stock in exchange for all outstanding MCI shares.

But GTE's offer might be too good to refuse, considering that WorldCom's stock is trading near its all-time high of $37.94 per share. This leaves open the possibility of diminished returns, depending on the stock's performance.

"Cash is cash," said Scott Wright, an analyst at Argus Research. "It's money you can put in your pocket. You can't put a WorldCom share in your pocket. It's a very tempting offer."

MCI officials reportedly scheduled an impromptu meeting Wednesday afternoon to mull over the latest offer.

Louis Ehrenkrantz, an analyst at Ehrenkrantz King Nussbaum, said GTE would surely suffer dire consequences if MCI accepts the offer.

"It's the stupidest thing I've ever heard," he said. "It will cost so much and cut so deep into their balance sheet that GTE will choke on it for years to come. It's just like when Viacom made its cash offer for Paramount. They had to borrow the money and now they're selling off assets just to get out of debt."

Wall Street's early reaction to the rumor mirrors Ehrenkrantz's concerns. GTE closed down $2.19 per share to $48 in afternoon trading despite posting better-than-expected sales and earnings in its third quarter. When the news broke, trading was suspended on MCI shares. Once trading recommenced, the stock closed up $1.56 per share to $36.88.

"This country has gone absolutely insane with acquisitions at any price," Ehrenkrantz said. "The market is a sane place, and you can tell from just the early trading today how it feels about this deal."

James Hem, an analyst at Olde Discount, said the proposed deal would give GTE a strong foothold in local and international customers, but questioned its timing.

"What makes MCI any more attractive today than it was 8 or 10 months ago when GTE was originally rumored to be interested?" he said. "It doesn't make a lot of sense."

MCI does have an enticing customer base that tends to spend more on telecommunications services than its competitors' customers do. According to International Data Corp., MCI users spend 10 to 15 percent more each month in long-distance and online charges than AT&T or Sprint customers.

"MCI has desirable customers who are more technologically savvy," said Gigi Wang, an IDC analyst. "MCI customers are typically younger and use the Internet more than the core customers at AT&T."

Analysts said MCI's board would likely accept the deal, but wonder how GTE will raise such an enormous amount of cash.

"They could omit their stock dividend to pay for it, but they aren't going to do that," Ehrenkrantz said. "So they're going to have to borrow it. And even at these low interest rates, it will kill them. They'll be paying it off for years and years to come."

On Wednesday, GTE reported strong third quarter earnings, driven by the continued excellent performance of its core businesses backed by strong growth in new service initiatives.

Earnings per share from core operations increased 10 percent from the same quarter a year ago, to 86 cents. Including the effects of the previously announced data initiatives, the reported earning per share of 79 cents was one cent higher than the prior year's 78 cents

During the quarter, consolidated revenues and sales increased by 11 percent to $5.94 billion. Excluding the $127 million of new revenues related to the new data initiatives, consolidated revenues and sales grew 8.8 percent, GTE said.

"We're quite pleased with their results, especially the growth they enjoyed in their vertical services market and cellular market," Wright said. "We've set a target price of $58 per share on the belief that the market doesn't recognize its growth potential. If this deal goes through, it shouldn't have the diluting effect that a company with a higher valuation might expect."

And what becomes of WorldCom?

"I wouldn't be surprised to see them either try to come back to MCI with a different offer, maybe a cash offer, or abandon MCI and try to work out a deal with BT," Wright said. "Things are happening so quick in this market that if you blink, you might miss the biggest merger in history."