An Investment Opinion by Alex Schay

WorldCom Bids to be a Truly Global Business

Intrepid WORLDCOM (Nasdaq: WCOM) makes a $30 billion bid for MCI COMMUNICATIONS CORP. (Nasdaq: MCIC) in what could be the largest merger in history. Audacious WorldCom attempts to snatch MCI from the clutches of BRITISH TELECOMMUNICATIONS (NYSE: BTY) after BT recently lowered its bid for MCI by 30%. Brash, aggressively self-assertive WorldCom continues its frenetic acquisition pace announcing a bid to acquire competitive local access provider BROOKS FIBER PROPERTIES (Nasdaq: BFPT). Are these just WorldCom CEO Bernard J Ebber's fantasy media headlines? No, it is this morning's news. WorldCom shocked the telecommunications world today with precisely these announcements, highlighting the power of stock appreciation and its currency value in doing deals. WorldCom, five years and forty acquisitions ago was just a long-distance reseller, now it is positioning itself to be THE world communications powerhouse, truly living up to its name by exploiting the potential of the 1996 Telecommunications Act.

Boosting shares of other competitive local exchange carriers (CLECs) and increasing valuations across the board this morning is WorldCom's announcement of its purchase of fiber optic network builder Brooks Fiber Properties. Most of the time a deal is the best gauge of valuation because it shows what an acquirer is actually willing to pay for a company, although in this case it may be distorted by the all equity transaction. Brooks common stock will be exchanged for 1.65 shares of WorldCom common stock (in a pooling transaction) that values the deal at just over $2.6 billion this morning, before debt. The merger will expand the number of U.S. all fiber optic local networks and switching facilities operated by WorldCom from 52 to 86 (34 of the 44 Brooks' markets are in cities that WorldCom did not have local facility presence). The superior gross margins (around 60%) of operating local facilities rather than co-locating make the deal compelling.

The real shocker this morning is WorldCom's proposed merger with MCI Communications, essentially kicking the Brits off U.S. soil if a three-way compromise is not worked out. WorldCom is proposing an exchange offer (in a purchase transaction) to acquire all of the outstanding shares of MCI for $41.50 of WorldCom common stock per MCI share. Following consummation of the exchange offer, WorldCom will effect a second-step merger with all remaining MCI stockholders (read: the 20% stake held by British Telecomm) receiving the same per share consideration. WorldCom's offer represents a 15% premium to MCI as of this morning's price. This transaction, valued at approximately $30 billion, is a premium of $9 billion to the market's current valuation of the proposed acquisition of MCI by British Telecomm.

WorldCom wants to capitalize on the brand awareness that #2 carrier MCI wields and claims that the synergies available to it and MCI (with both operating on U.S. soil) make it a better "fit," allowing WorldCom to offer a premium to BT's offer. WorldCom also claims that the deal would be accretive to earnings by at least 20% in the first year and that 8-9% pre-tax operating costs could be saved. So, why would WorldCom engage in the transaction now, coming on the heels of a coup with AOL? The answer -- share price. WorldCom has seen the highest share price appreciation in the telecommunications space over the last five years and has the second highest returns on equity of all listed companies over the same period. Doing the deals now when the stock is around a 52-week high and trading at roughly 6x sales and 82x times trailing earnings is just smart business.


In the wake of WorldCom's bid for MCI, investors have launched a wholesale re-valuation of facilities-based interexchange carriers and competitive local exchange carriers. PRIMUS TELECOMMUNICATIONS GROUP (Nasdaq: PRTL) rose $1 7/8 to $11 7/8, IXC COMMUNICATIONS (Nasdaq: IIXC) gained $2 7/8 to $34 5/8, ICG COMMUNICATIONS (Nasdaq: ICGX) popped up $3 1/16 to $27 9/16, and INTERMEDIA COMMUNICATIONS (Nasdaq: ICIX), which recently acquired fiber-rich Digex, rose $7 5/16 to $54 1/4.

Other companies gaining ground on the WorldCom news include GST TELECOMMUNICATIONS (AMEX: GST) up $1 1/16 to $14 3/4, WINSTAR COMMUNICATIONS (Nasdaq: WCII) rose $1 5/16 to $20 1/2, TELEPORT COMMUNICATIONS GROUP (Nasdaq: TCGI) was boosted $6 3/8 to $51 1/4. C TEC CORP. (Nasdaq: CTEX), which just completed a restructuring to isolate the value of its competitive local phone operations, gained $1 13/16 to $15 11/16.

Not only is WorldCom out shopping for MCI, but it also announced a deal to acquire competitive local exchange carrier and diversified telecommunications company BROOKS FIBER PROPERTIES (Nasdaq: BFPT) for 1.85 shares of WorldCom stock for each Brooks Fiber share. Brooks gained $8 1/2 to $55 3/16.

BRITISH TELECOMMUNICATIONS (Nasdaq: BTY) gained $5 1/4 to $71 7/8 and British telecom company CABLE & WIRELESS (NYSE: CWP) rose $1 9/16 to $27 7/16 on the WorldCom bid for MCI.

AMATI COMMUNICATIONS (Nasdaq: AMTX) rose $11/16 to $19 3/8 after agreeing to merge with WESTELL COMMUNICATIONS (Nasdaq: WSTL), exchanging each Amati share for 0.9 shares of Westell. Both companies design, assemble, and market digital subscriber line (xDSL) telecommunications equipment. Other xDSL companies also moved on the news, with AWARE INC. (Nasdaq: AWRE) gaining $1 3/8 to $14 and ORCKIT COMMUNICATIONS (Nasdaq: ORCTF) rising $7/8 to $19.

Wireless telecommunications equipment provider POWERWAVE TECHNOLOGIES (Nasdaq: PWAV) gained $2 7/8 to $41 5/8 on announcing a $12.8 million order from LG Information & Communications and Samsung Electronics.

ALL AMERICAN COMMUNICATIONS (Nasdaq: AACIB) picked up $2 to $24 3/4 after the television and music production company agreed to be acquired by U.K.-based Pearson plc for $25.50 per share in cash.

Wireless communications company ASSOCIATED GROUP (Nasdaq: AGRPA) added $4 to $74 1/2 after announcing that Japan's NTT will invest $100 million in Associated Group's Teligent unit. This unit offers wireless competitive local exchange telecom services.

GULF SOUTH MEDICAL SUPPLY (Nasdaq: GSMS) advanced $2 1/4 to $29 on announcing an agreement to acquire Tri-Medical Supply, a $23 million medical supplies distribution subsidiary of VENCOR INC. (NYSE: VC).

WHG RESORTS & CASINOS (NYSE: WHG) gained $2 3/8 to $22 7/8 after the Puerto Rican resort operator agreed to be acquired by real estate investment trust PATRIOT AMERICAN HOSPITALITY (NYSE: PAH). WHG shareholders will receive 0.784 shares of Patriot for each WHG share -- subject to adjustments.

Bookseller BARNES & NOBLE (NYSE: BKS) rose $2 3/16 to $30 7/16 after the London Times reported that B&N is launching a multi-million pound foray into the U.K. market. Merrill Lynch also dubbed the company its "Focus One" stock of the week.

MYRIAD GENETICS (Nasdaq: MYGN) climbed $1 9/16 higher to $27 1/2 and U.S. BIOSCIENCE (AMEX: UBS) rose $1 1/4 to $12 5/8 after UBS Securities started coverage of both companies with "buy" ratings.


BOSTON LIFE SCIENCES (Nasdaq: BLSI) collapsed $3 7/8 to $3 5/16 after reporting unsuccessful results in the Phase III trial of its rheumatoid arthritis treatment.

Telecommunications and computer timing device manufacturer DATUM INC. (Nasdaq: DATM) crashed $13 5/8 to $32 1/4 this morning before being halted for pending news.

TRIQUINT SEMICONDUCTOR (Nasdaq: TQNT) lost $7 7/8 to $28 1/4 after the mixed signal and analog semiconductor company said it will miss Q3 EPS estimates of $0.29. Customer product delays and other factors will also affect results for the coming two quarters. At least 25% of the analysts covering the company had already issued downgrades by noon today.

Hardware and software simulation systems company IKOS SYSTEMS (Nasdaq: IKOS) slid $2 9/16 to $10 on announcing a shortfall in expected fourth quarter revenues and EPS. Earnings will come in at the $0.05 per share level -- before charges -- more than 75% below the mean First Call estimate.

ALPINE LACE BRANDS (Nasdaq: LACE) lost $1 3/8 to $8 5/8 after the maker of reduced fat cheeses announced an agreement to be acquired by dairy products company Land O'Lakes for $9 1/8 per share.

Material handling equipment and electronics manufacturer REPTRON ELECTRONICS (Nasdaq: REPT) was taken down $2 5/16 to $16 after the company pre-announced Q3 EPS of $0.23 to $0.25, below the mean estimate of $0.40.

ADVANCED MICRO DEVICES (NYSE: AMD) fell $3 15/16 to $28 5/8 after once again pre-announcing downward revisions to its expected earnings for the third quarter. The company said lower yields on its K-6 chips have hurt revenues and that its operating loss per share for the quarter will be "substantially larger" than the expected $0.03 loss per share.

3-M spin-off IMATION CORP. (NYSE: IMN) fell $2 1/8 to $24 7/16 after announcing that it expects to miss the mean third quarter EPS estimate of $0.29 with per-share earnings of $0.11. The maker of storage products and other products for the imaging and information industries said competitive pressures and a strong U.S. dollar are to blame.

IVAX CORP. (AMEX: IVX) tumbled $1 3/16 to $10 3/4 after the generic drug company said it expects a loss from continuing operations to be larger than the $53 million loss from continuing operations the company reported last quarter. That means the expected quarterly loss will be about four times the average loss per share estimated by the five analysts covering the company.


(416) 626-4100 (code: 633413) -- replay

(800) 964-3296 -- replay through 10/2

(800) 839-8273 -- replay through 10/2


3COM (Nasdaq: COMS) Call

FOOL PORTFOLIO BORING PORTFOLIO AMZN down $9/16 at $51 1/2 ATLS down $3/16 at $27 7/8 AOL down $1 1/8 at $74 5/16 BGP down $1/16 at $27 7/16 ATCT down $3/32 at $4 3/32 CSCO up $1 1/16 at $74 1/8 CHV up $1 1/16 at $84 1/8 CSL up $1/4 at $44 11/16 COMS unch. at $51 1/4 GNT up $1/16 at $47 1/16 DJT unch. at $10 5/16 ORCL up $1/8 at $36 9/16 GM up $1 1/8 at $68 1/16 OXHP down $3/8 at $74 1/2 INVX down $25/32 at $31 15/32 PMSI down $1/2 at $13 1/2 IOM unch. at $26 1/8 TDW up $1/4 at $59 1/2 KLAC down $29/32 at $66 5/8 LU up $1 7/16 at $82 13/16 MMM up $15/16 at $93 3/8 T down $3/8 at $43 7/8

WE DELIVER - Get The Lunchtime News delivered
to your e-mailbox every afternoon!


Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Lunch Report on RealAudio, produced by partner Westwind studios and sponsored by Mapquest.

Alex Schay (TMF Templr), a Fool
Fool Plate Special

Dale Wettlaufer (TMF Ralegh), a Fool
Ups & Downs

Brian Bauer (TMF Hoops), another Fool