Many of the same investors who had warmly embraced WorldCom's bid for MCI are turning up their noses at GTE Corp.'s attempt to purchase MCI.
GTE, Stamford, Conn., is offering $28 billion in cash; WorldCom Inc., Jackson, Miss., had made a $30 billion, all-stock bid for Washington-based MCI Communications Corp. WorldCom's offer came just as MCI was close to finalizing a $31 billion deal to merge with British Telecommunications P.L.C.
"If you ask me who I think is better suited as a partner for MCI, my answer would be WorldCom, hands down," said Brian Hayward, portfolio manager for INVESCO Funds Group Inc., Denver.
Mr. Hayward acknowledged MCI is the largest acquisition WorldCom ever has attempted. But he added: "Anyone who has followed them (WorldCom) would be comfortable taking their shares in this offer."
He said WorldCom has "a very favorable track record, and I don't view them as a house of cards."
INVESCO owned about 800,000 shares of GTE, 600,000 shares of WorldCom and 65,000 shares of MCI as of June 30, according to CDA/Spectrum 13(f) Institutional Stock Holdings.
GTE shareholders 'not pleased'
Another money manager with holdings in MCI, GTE and WorldCom is Loomis, Sayles & Co., Boston. "I can tell you that GTE shareholders, including ourselves, are not pleased with this offer, and that the company is making a number of heroic assumptions regarding synergies that may or may not come true," said Paul Wright, Loomis vice president.
Loomis, Sayles held about 2.2 million shares of GTE, 40,000 shares of MCI and about 100,000 shares of WorldCom as of June 30, according to Spectrum.
"Rather than buying MCI, if they took that $28 billion and did a share buyback, they'd have the same risk in terms of leverage and wouldn't have the risk in terms of being wrong about synergies," Mr. Wright said.
"They'd also have 4% greater earnings growth compounded per year than with the MCI acquisition."
He added: "I'm certainly convinced that (WorldCom's) stock is of more intrinsic value than GTE's."
Said Brian Mulligan, vice president and leader of the large-capitalization growth area at Wells Fargo & Co., San Francisco: "When Bernie Ebbers (chief executive officer and president of WorldCom) was out here a couple of weeks ago . . . it was apparent he has carefully crafted his acquisitions, piecing together the right fit. Both WorldCom and MCI are very good marketers, whereas GTE's mired in the local phone business and its management is too conservative."
Spectrum reported Wells Fargo held about 2.1 million shares of GTE and 800,000 shares in WorldCom at the end of the second quarter. Mr. Mulligan said his company's position in GTE has remained "about the same" since.
One mitigating factor
Mr. Hayward, meanwhile, pointed out one mitigating factor in GTE's bid: cash. "Because their bid is in cash, unlike WorldCom, we wouldn't have to decide if we wanted to hold onto their stock."
American Express Asset Management, Minneapolis, is a sizable shareholder in both would-be acquirers. Spectrum listed the firm as holding about 3 million shares of GTE and 7.8 million shares of WorldCom as of June 30.
Larry O'Connell, vice president and senior analyst, said: "Even though it's David acquiring Goliath, WorldCom's strategy for merging with MCI simply makes more sense.
"The company is positioning itself as a telecom company that others will have to emulate. Also, the mentality at the two companies is very similar in that they both see themselves as underdogs and are willing to take on an attack strategy."
Mr. O'Connell warned his positive attitude toward GTE might be changing; in fact, he might lower its weighting.
Added Richard Earnest, senior vice president of Pacific Alliance Capital Management, San Francisco: "As a GTE shareholder, we would be more inclined to lower our holdings of the company if this deal goes ahead.
"It becomes a different vehicle than what we initially invested in, and one that would be very hard to analyze."
As the investment arm of Union Bank of California, Pacific Alliance holds about 900,000 shares of GTE, he said.
Another GTE shareholder is Harbor Capital Management, Boston. "A lot has changed since earlier this year, when we held GTE as somewhat of a defensive instrument in a group that was undervalued," said John Slavik, vice president of investment research at Harbor Capital. "If this deal to purchase MCI comes through, you have to look at GTE as somewhat of a concept stock, and to this point, we're not really convinced of the concept they're putting forward for their future."
Mr. Slavik said Harbor has reduced its holdings of GTE since the second quarter from slightly more than 1 million shares to "significantly less than that."
BT may be GTE partner
Meanwhile, observers believe GTE may bring in British Telecom as a partner in its bid.
"GTE would have to pay out close to $30 billion in cash and assume an additional $5 billion in debt from MCI," said Mr. O'Connell. "What does $35 billion in debt do to the little GTE shareholder? I don't think he's going to be happy. We know that BT really wants MCI, and having lowered its offer to $21 billion, is unlikely to raise it again.