WorldCom Director Uses Exotic Play
to Hedge Stake
October 15, 1997
The Wall Street Journal
By Elizabeth MacDonald
WorldCom Inc., Chief Executive Bernard J. Ebbers
may have grandiose ambitions for his upstart telecommunications
company, embodied in its $30 billion bid for MCI Communications
Corp.
But at least one of WorldCom's 11 directors is hedging
his bet.
Outside director, David C. McCourt, 40 years old,
who joined the board in connection with WorldCom's
$14.3 billion acquisition last year of MFS Communications
Co., has arranged to limit his gains and losses on
his 812,308 shares of WorldCom stock.
When Mr. McCourt swapped his stock in MFS/McCourt
Inc., a Boston unit of MFS, for the WorldCom shares
in June, he got some portfolio insurance in the form
of a "zero-cost collar" on the WorldCom
shares, according to CDA/Investnet, a Fort Lauderdale,
Fla., service that tracks transactions by corporate
executives and directors known as insiders.
The collar, sold by Merrill Lynch & Co., protects
Mr. McCourt against any down-draft in WorldCom's stock
below $28 over the next five years, but he has to
surrender any profit above $64. Yesterday, WorldCom
stock closed at $36.75, unchanged, in trading on the
Nasdaq Stock Market.
WorldCom declined to comment on the hedge. In an
interview yesterday, Mr. McCourt said he entered into
the exotic derivative contract "to protect my
investment." He recalled that he was naturally
nervous about his stake because he had only known
Mr. Ebbers and his management team for just three
months before he decided to merge MFS/McCourt with
WorldCom.
"Originally, I wanted to protect my holding
because when you sell something for stock, and you
don't know the people, it's a smart way to manage
the investment." He added, 'But had I known him
and the rest of the management team the way I know
them now, I never would have entered into the transaction,
because I left a lot of money on the table because
the stock has done nothing but go up."
Mr. McCourt said he likes what he sees in Mr. Ebbers.
Both want to compete against monopoly telephone and
cable-television companies for residential phone,
cable-TV and Internet business. Both came from scrappy
beginnings. Mr. McCourt used his Boston background
in construction and urban cable systems to become
a telecom player. Mr. McCourt merged a fiber-optic
cable company he owned in Boston with MFS in the 1980's,
hence creating MFS/McCourt.
Last month, Mr. McCourt split C-Tec Corp. of Princeton,
N.J., where he was chairman, into three separate public
companies - Commonwealth Telephone Enterprises, Inc.,
Cable Michigan, Inc., and RCN Corp. Today, he runs
the newly independent RCN, a telecommunications provider
in Princeton, N.J., which posted $60.7 million in
revenue for the first six months of 1997.
Mr. McCourt donned the zero-cost collar for his WorldCom
stake on June 19 via two simultaneous options transactions.
He sold 812,308 call options, which obligate him
to sell his WorldCom stock at a price of $64 a share,
effectively forfeiting any gains if the stock rises
above that amount. He also bought 812,308 put options
giving him the right, but not the obligation, to sell
his stock at a price of $28 a share.
The puts bulletproof Mr. McCourt's WorldCom holdings
against a downturn below the $28 price until June
19, 2002, The day he entered into the collar, WorldCom's
stock had risen to $31.75 from $26 a year earlier.
Such a collar gets the "zero-cost" label
because the cost of the puts is generally offset by
the income from the calls. Mr. McCourt still gets
to vote the shares and receive dividends, while avoiding
immediate capital-gains taxes since he hasn't actually
sold the stock.
Mr. McCourt's WorldCom stock is a small fraction
for the 20.5 million WorldCom shares held by directors
other than Mr. Ebbers. Still, Robert Gabele, president
of CDA/Investnet, says investors should watch such
insider hedges, and not just simple stock sales or
purchases, for additional clues to sentiment among
corporate officers and directors.
Such insiders are increasingly buying such derivatives
from the likes of Merrill and Morgan Stanley, Dean
Witter, Discover & Co to hedge themselves against
overexposure to a single company's stock.
Some analysts view the hedge as a mere financial-planning
move. Mr. McCourt "exercised his right to realize
near-term income on his equity holding by writing
calls," says William D. Vogel, senior telecom
analyst at NationsBanc Montgomery Securities.
But Craig Columbus, vice-president at Disclosure
Inc., a Bethesda, Md. Insider-trading research firm,
says Mr. McCourt's hedge "is about a lot more
than realizing income."
The collar certainly took on additional significance
after the WorldCom bid for MCI was announced two weeks
ago; WorldCom's number of shares outstanding would
roughly double if the MCI takeover goes through.
WorldCom now expects to issue about 812 million new
shares to complete the MCI deal, on top of the 920
million shares already on the market. Mr. McCourt
wouldn't say
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