MCI Worldcom Is Facing Question Over Statement
New York Times
June 3, 1999
By EDWARD WYATT
When is the truth not the whole truth? That is the question
reverberating through the offices of MCI Worldcom.
Last week, MCI Worldcom, the telecommunications giant, issued what
many investors took to be a firm denial that it might acquire Skytel
Communications Inc., a paging company. MCI said its registration of an
Internet address combining the companies' names was "not an indication
of official company intention." To investors' surprise, MCI announced
such a deal just three days later.
The incident raises anew some prickly legal questions about when a
company's statements might be misleading, because of what the company
says or what it omits. Experts in securities law say that MCI appears to
be skating on thin ice.
"If you ask for my gut feeling, it looks pretty bad," said James E.
Schrager, a professor at the University of Chicago Graduate School of
Business.
MCI maintains it has done nothing wrong and its comments were
misconstrued. Whether investors were misled by MCI's statements and
whether the company is liable for their losses can only be decided in
court or by Federal regulators. So far, no lawsuits have emerged.
But questions arose on May 25 when an online news service called
Company Sleuth reported that MCI had registered the Internet domain
name "skytelworldcom.com," an Internet address that combined parts of
the two companies' names.
Registering domain names has become a common practice in corporate
America to try to ward off poachers, individuals who grab names and
then try to sell them to companies for high prices.
The news that an employee of MCI had nailed down rights to the joined
name of these two independent companies renewed speculation that
Skytel was close to being acquired. Similar rumors had surfaced
periodically over the previous two months, with good reason.
In April, Skytel announced that it had retained an investment banker to
explore "strategic alternatives," which in Wall Street lingo usually means
that a company is seeking an acquirer. And several publications, including
Business Week, named MCI as a possible suitor.
When news services reported the new Internet address on May 25,
trading surged in Skytel shares, sending the stock price soaring. After
closing the previous day at $18.875, Skytel shares traded as high as
$21.875, a gain of 16 percent.
But shortly after noon that day, an MCI spokeswoman began telling
reporters who called to ask that the MCI employee who registered the
Internet address did so on his own initiative. The employee, who worked
in the company's Internet group, had seen chatter about a possible
MCI-Skytel deal on Internet message boards, said Barbara Gibson,
senior manager of corporate communications at MCI.
Ms. Gibson read to reporters a statement that said: "From time to time,
MCI Worldcom employees, sometimes acting on their own initiatives,
register domain names they believe may be potential targets of
domain-name squatters. In this case, the action is not an indication of
official company intention."
Investors interpreted that statement to mean that MCI had no intention of
acquiring Skytel -- a new Web addresses notwithstanding. That sent
Skytel's shares falling back below the previous day's closing price, to as
low as $18.6875. The shares finished the day at $20.125 on volume of
7.5 million shares, three times the stock's recent average daily volume.
Three days later, after the close of trading on the Friday before the
Memorial Day weekend, MCI announced it would buy Skytel for $1.3
billion in stock -- or roughly $21.50 a share.
Experts in corporate disclosure and securities laws say that, in light of the
merger announcement, MCI has some explaining to do.
Even if MCI makes a practice of snapping up Internet domain names that
include the names of potential partners, this example "dances close to the
line," said Schrager of the University of Chicago.
At issue is whether MCI's statement would cause a reasonable investor
to be misled, either because of what it says or what it omits.
"A company can't speak half-truths," said Thomas Newkirk, associate
director of the S.E.C's division of enforcement. Newkirk declined to
comment on any aspects of the MCI-Skytel case. But speaking generally
about disclosure issues, he said companies "can't make a statement that is
true on its face but which is false or misleading because it omits other
information."
That precedent was laid out in a case involving Carnation's 1984
takeover by Nestlé, the Swiss food and candy company. The S.E.C.
said that Carnation had spread "materially misleading" information when,
in response to queries about its rising stock price and rumors of a
pending takeover, it said there was no news to account for the stock
action.
In fact, Carnation was in takeover
negotiations at the time, and the
S.E.C. said that the company
therefore had two options: say
nothing or tell the truth.
Newkirk explained: "A company can
say 'No comment.' But if it does
comment, it can't make a false or
misleading statement." Carnation later agreed to pay $13 million to settle
a lawsuit contending that the company had misled investors and artificially
depressed its stock price by denying the takeover rumors.
Four years later, in 1988, the Supreme Court further expanded the
obligations of companies to disclose merger negotiations. In Basic Inc. v.
Levinson, the court ruled that companies had an obligation to avoid
misleading denials of merger talks or incomplete statements about
negotiations once the talks reached a stage that a reasonable investor
would consider significant.
It is uncertain whether those precedents would directly apply to the
Skytel situation, in which MCI's statements affected not its own stock
price but that of another company.
Ms. Gibson, the MCI spokeswoman, said the company did not in its
statement last week confirm or deny anything about its intentions
regarding a takeover of Skytel. Instead, it offered "No comment" when
asked specifically about the possibility. She added, "It was certainly not
my intention to mislead anyone."
Not many investors appear to be worried about the issue. At a company
meeting in New York yesterday with financial analysts, no one raised a
question about the statements, despite some chatter on Internet bulletin
boards.
But investors who sold their Skytel shares for less than $19 after hearing
the company's disavowal of the Internet name might soon raise some
pointed questions of their own.
nytimes.com |
