GTE offers $28 billion to buy MCI Bid is third proposal for No. 2 long distance company in the U.S.

MCI board to meet soon

Merger attempts soar as phone companies try to expand services


NEW YORK -- Adding yet another combatant to the richest corporate takeover battle in U.S. history, GTE Corp., the nation's third largest local telephone company, made an unsolicited offer yesterday to acquire MCI Communications Corp., the nation's No. 2 long-distance carrier, for $28 billion.

GTE's all-cash bid came two weeks after Worldcom Inc., an upstart telecommunications provider, offered $30 billion in stock for MCI. That proposal was also unsolicited, and like GTE's offer is meant to overtake a previous agreement by MCI to be acquired by British Telecommunications PLC for about $19 billion in cash and stock.

MCI did not comment, other than to say that its board, which was already studying the Worldcom offer, planned to meet again lTC soon to weigh its options.

But no matter how MCI chooses to respond to these or any subsequent offers or counteroffers, the flock of suitors signifies the telecommunications industry's relentless imperative to consolidate.

Deregulation, the upsurge in wireless communications and the Internet's soaring popularity are now compelling telecommunications companies of all sorts and sizes to reach out for partners that can help them offer every conceivable communications service under a single brand name.

"The key product strategy going forward for us is a bundled service -- local long-distance, data, international, wireless, paging," Charles Lee, GTE's chairman, said in an interview after announcing his company's offer for MCI yesterday, after the markets closed. "The ability to bundle is absolutely essential to our ability to succeed going forward."

Companies able to assemble such a lineup of services seek not only the rewards of rich revenues but also the considerable cost savings that would come from operating full-service networks.

"We're going from customers taking multiple services from multiple vendors to taking multiple services from one vendor," said Eric Strumingher, a telecommunications analyst at the investment house Paine Webber. "The idea for the companies is to get in now while the getting's good and lock those customers in."

The big communications industry takeover battles of the past -- like the bidding war a few years ago in which Viacom prevailed over QVC Inc. to acquire Paramount -- have focused on creative control of information and entertainment. But these days the big-ticket communications deals are for control of information pipelines.

Even though GTE's $40-a-share offer for MCI is priced at slightly less than Worldcom's, Wall Street sees GTE's bid as credible because MCI's shareholders may prefer the security of GTE's cash to the uncertainty of accepting Worldcom's stock, which has lost about 5 percent of its value over the last week.

Still, in a statement yesterday, Worldcom contended that it was the superior suitor.

"Our $41.50 offer provides superior near-term and long-term value for MCI shareholders," Worldcom said. "Worldcom and MCI have more compatible cultures than GTE and share a common entrepreneurial spirit, enabling Worldcom-MCI to compete more effectively."

Although a combined GTE-MCI would be a giant with annual revenue of about $40 billion, it would still be about 20 percent smaller than AT&T Corp., the nation's No. 1 long-distance telephone company, which had about $52 billion in sales last year.

A combined GTE-MCI, however, would be the first company since the court-enforced breakup of AT&T in 1984 to have a large presence in both the local and long-distance telephone markets.

GTE serves about 21 million local telephone customers scattered across 29 states, mainly in rural and suburban areas but including Honolulu, Los Angeles, and Tampa and St. Petersburg, Fla. MCI, meanwhile, controls about 20 percent of the $80 billion long-distance business.

Although the Telecommunications Act of 1996 allows a single company to offer both local and long-distance service, doing so requires a sign-off by the Federal Communications Commission. The sheer size and competitive power of any MCI acquisition, moreover, makes a separate federal antitrust inquiry highly likely.

People close to current FCC Chairman Reed Hundt said yesterday that the commission would no doubt give careful study to a proposed GTE-MCI merger but that they would not expect outright opposition.

But one antitrust expert predicted harsher scrutiny by the Justice Department.

Philip Verveer, a lawyer at the firm of Wilkie, Farr & Gallagher, who argued the government's case against AT&T when he worked for the Justice Department, said that a GTE-MCI merger would be "harder than Worldcom, because GTE possesses these local monopolies that are very deeply entrenched,"

"This is conceptually the same as the analysis that led the Justice Department to seek the breakup of the old Bell system," Verveer said. "The Justice Department will give this thing a very, very hard look."

GTE would assume MCI's debt of about $6 billion and said its earnings per share would grow more slowly over the next two years than they would have otherwise -- only about 10 percent, instead of previous forecasts of at least 13 percent.

But by 2000, Lee predicted, the combined companies would begin to post annual earnings growth of at least 20 percent, in part because the combination would result in cost savings of between $1.6 billion and $2.2 billion annually.

GTE's unexpected offer raised new questions among telecommunications executives and analysts about the direction of AT&T, with which GTE has held exploratory merger discussions over the past year.

Pub Date: 10/16/97

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