The Message in GTE’s MCI Offer
Gee! No, GTE!
Just as GTE Corp. once used that advertising slogan to gain the respect it’s lacked while operating in the long shadows of AT&T; Corp. and the Baby Bell phone companies, so now is GTE’s audacious $28-billion takeover bid for MCI Communications Corp. aimed at transforming GTE into the telecommunications company of the future.
As the nation’s third-largest provider of local telephone service, GTE serves 21 million customers, including 3 million in California. Among its biggest markets are Los Angeles, Santa Monica and Long Beach. Now, GTE hopes to shove aside a rival bid for MCI by WorldCom Inc. in order to dock its local service with MCI’s massive long-distance network.
The offer is part of GTE Chairman Charles R. Lee’s strategy of having GTE offer businesses and consumers nationwide every major form of telecommunications service--thus exploiting the ongoing deregulation of the industry--and so enhance GTE’s ability to survive as one of the industry’s biggest players.
“This is a great move for GTE,” said analyst Ivan Arteaga at the money management firm Gabelli & Co. “It definitely makes them a major force.”
Besides local and long-distance calls, GTE is a major provider of wireless phone service, and it wants to offer customers a panoply of data and video transmission services.
And Stamford, Conn.-based GTE is making a major bet on providing Internet services. In August, it paid $616 million to buy BBN Corp., an Internet pioneer that is expected to help GTE offer high-speed Internet access to its customers.
But as telecommunications increasingly sheds its regulations and becomes a wide-open marketplace--both in local calls and long-distance--industry providers are trying to enhance and expand their services. That’s why there’s been a rash of mergers in the industry, with SBC Communications Inc.’s purchase last spring of Pacific Telesis Group being just one example.
In addition, GTE is not subject to the same regulatory restrictions faced by the regional Bell operating companies, which must prove their local markets are open to competition before they can enter the long-distance business.
Hence, GTE had been expected for more than a year to seek a partner. It’s also likely that GTE’s Lee--who became chief executive in 1992--took aim at MCI partly to avoid having GTE be gobbled up by another company.
GTE’s bid for MCI, however, is one of the first big efforts by a local operator to hook up with a long-distance carrier.
“GTE is in the ballgame for the long run,” said Dave Otto, an analyst at the brokerage firm Edward D. Jones & Co. in St. Louis. “They want to be one of the big names in telecommunications, not only in the U.S., but in the world.”
In looking for partners, “there are not many single girls left on the dance floor,” he said.
MCI, though, clearly would be a gamble because of its enormous price tag. GTE, which earned $2.8 billion on revenue of $21.3 billion last year, already has more than $14 billion of long-term debt on its balance sheet. The debt burden has been manageable for GTE so far, but it’s unclear whether it can incur billions more to finance MCI and still maintain its current levels of profitability.
Regardless, Lee’s decision to make a run at MCI is the latest example of the way he’s trying to shed GTE’s stodgy, conservative legacy in favor of an aggressive, risk-taking stance that would enable GTE to survive the upheaval accompanying deregulation. Bidding for MCI “is about as bold as you get,” Otto said. “But it’s really just a sign of the times.”
GTE local phone and wireless services cover 27 states, but the company lacks a significant presence in long-distance. GTE has been trying to break into that market, but it leases the wires from other companies, such as AT&T.; MCI would give GTE a long-distance network of its own. That also would put GTE head-to-head with long-distance kingpin AT&T;, which as recently as last week was rumored to be contemplating an offer to buy GTE.
GTE, started in 1918 as General Telephone, began as a collection of small phone companies--many in rural areas--strewn across the country. They were companies that hadn’t been purchased by the old American Telephone & Telegraph.
But the meager returns from those small operations long hobbled GTE’s ability to invest in streamlining its fragmented network of equipment. The lack of investment, in turn, meant that GTE was often criticized as offering lousy service.
With the breakup of AT&T; in 1984, the creation of the Baby Bells and subsequent changes in telecommunications, phone providers offering more kinds of services began to grow faster. Some of GTE’s expansion has been the result of acquisitions such as that of phone-service provider Contel Corp. in 1991.
And now, since the landmark Telecommunications Act of 1996 further deregulated the industry, GTE’s patchwork of local service is seen as a big advantage. GTE now can peddle its long-distance, Internet and data-transmission services coast-to-coast.
But first GTE has to dial in MCI. David Burks, an analyst at the investment firm J.J.B. Hilliard, W.L. Lyons Inc. in Louisville, Ky., believes it’s likely WorldCom will respond with a counteroffer for MCI, possibly going as high as $50 a share in stock.
Separately, GTE reported that its third-quarter profit, at $756 million, was unchanged from a year earlier, saying costs related to expanding its data-services operations offset gains from its core phone services. But its earnings per share inched up to 79 cents from 78 cents because there were 1% fewer shares outstanding. Revenue for the period ended Sept. 30 rose 11%, to $5.94 billion from $5.34 billion a year earlier.
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