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High stakes for Net in MCI merger

The courtship of MCI Communications has turned into a multibillion-dollar competition with enormous stakes for the Internet.

The courtship of MCI Communications (MCIC) has turned into a multibillion-dollar competition with enormous stakes for the Internet.

As the long distance company's merger agreement with British Telecom (BTY) has stalled, two new bids for MCI have been made in the last two weeks. Yesterday, MCI announced that it intends to meet GTE (GTE) and WorldCom (WCOM), which each have important Internet agendas, to discuss their respective merger proposals.

This comes as MCI and BT mutually agreed to eliminate a provision in their merger agreement that would have restricted discussions with GTE and WorldCom. And, ironically, it may be BT that has the final say in which proposal MCI chooses, analysts say, because the British international already has a sizable 20 percent stake in the U.S. long distance carrier.

If British Telecom manages to salvage its deal, MCI plans to build the world's largest private backbone network, to be called Concert. A merger with WorldCom, on the other hand, would give MCI access to the world's largest Internet service provider, UUNet, as well as access to CompuServe and America Online's network services company.

A GTE deal would significantly advance MCI toward its goal of grabbing more Internet business. GTE would bring to the table its recent acquisition of BBN Planet, a deal it had sought as a way to expand beyond its local telephone business with an online dimension that will allow it to become a national provider of voice, video, and data services.

GTE is offering $28 billion in cash for MCI. WorldCom said it would offer $41.50 in stock for each share of MCI, giving the proposed deal a $30 billion value. BT, meanwhile, has offered a combination stock and cash deal that is valued at just under $20 billion based on yesterday's market close.

"What is best for shareholders? Not the BT deal, which obviously is a lot less money," said Richard Toole, an analyst at Merrill Lynch. "The real question is whether MCI is better off giving cash to its shareholders [via the GTE cash offer ] with tax implications on the gain, or shares in WorldCom, a company that is very aggressive and smart, but very different."

Toole added that, if MCI takes the GTE offer, it would get less of a total value based on WorldCom?s current share price. Nevertheless, MCI would get cash out of the deal.

"All parties to the MCI saga, including British Telecom, have yet to play their best cards," Shawn Patrick Burke, an analyst with PaineWebber, said in a report. "We do not view this [GTE proposal] as superior to the $41-ish per share stock swap with WorldCom based on what we perceive as dramatically weaker synergies, particularly at the local business traffic-termination level."

John Spellman, an analyst with Deutsche Morgan Grenfell, also favors the WorldCom deal, especially because of its strategy to target the lucrative business market.

He noted that a GTE-MCI deal would put more emphasis on the consumer market, which tends to be more price-sensitive than corporate clients. Analysts also note that a GTE-MCI merger likely would receive more regulatory scrutiny than the WorldCom deal.

So what it comes down to, according to Toole, is the kind of merger MCI decides it wants: a "vertical" or a "horizontal" one. A vertical merger like GTE?s local telephone service would add different types of services to MCI?s existing offerings, while a horizontal partner like WorldCom would expand existing offerings to new areas.

No matter what happens in this corporate courtship, British Telecom will have significant influence. Even if it loses the bidding war, BT could be a determining factor in the ultimate merger decision because of the stake it already holds in MCI. "Both bids are matters for the MCI board, and BT will continue to consider the issues raised in the context of the company's strategic merger agreement with MCI," British Telecom said in a statement yesterday.