Gekko

National Review, Oct 27, 1997 by John Dizard

SOME people think I'm far too narrow-minded about European Monetary Union, that I'm unwilling to consider the positive side of the EMU story, that I'm just another Anglo-Saxon chauvinist. That's probably true (except that I'm more Picto-Celtic than Anglo-Saxon). Just to show my new open-mindedness, I'm going to give the other side a hearing in my very own space.

"The constitution of Europe as an economic unit will not result in the disappearance of nations, but the community of interests will to a large extent create a political community. [A monetary union should be established] on the basis of a European fixed-exchange-rate mechanism, guaranteed by unifying the methods of monetary creation and the management of central banks."

Who among the current European leaders could not agree with such sentiments? True, the quote is taken from a 1941 editorial in a pro-Nazi French newspaper, La Vie Industrielle, but that doesn't mean we should question the wisdom of the Eurocratic class, does it? Human nature has changed so much in the intervening years, after all, thanks to modern methods of social engineering.

Or maybe it hasn't. In which case, you might want another piece of advice from yours truly, which is to sell any British gilts (T-bonds) you might have. Or short them against the German Bunds. There has been an irrational runup in the price of British government bonds based on the misapprehension that the British public is going to change its mind and go along with joining EMU. But it won't. And gilts have gone from being undervalued pieces of paper at the beginning of the year -- you will recall I liked them against the European bonds -- to being overpriced ones today. The smart money will soon sell them.

Some in the merger-and-acquisition arbitrage community are concerned that MCI may find a way to fend off WorldCom's takeover bid. They needn't worry about that. The WorldCom people have a hitherto secret plan to counter resistance. They'll just call MCI executives at home, at the dinner hour, repeatedly, and insist on reviewing the savings possible under the takeover plan.

Not that such cruel tactics will be necessary. WorldCom will win because its stock is so highly valued that even with the premium it's paying for MCI, the deal will be accretive to earnings. In other words, WorldCom is paying out Confederate money and getting real assets in return, and so it can afford to keep up what has been a perpetual-motion machine. And apart from the clever manipulation of Wall Street by a hick from Mississippi, WorldCom is winning because Bernie Ebbers really is a superior operating manager who has organized a better team.

The greyer among you will recall a similar perpetual-motion machine back in the Sixties and Seventies, called ITT. It used to be a telecommunications company before it was turned into a gambling company, and its earnings were kept up by a series of deals in which it bought cheap assets in return for expensive stock. It grew so powerful that it was credited or blamed with the overthrow of the government of Chile and the corrupting of Richard Nixon. Eventually, of course, perpetual-motion machines based on acquisitions run out of motion and become not so perpetual. The high-priced stock becomes lower-priced stock, some acquisitions turn out to be trouble incarnate, and the genius at the top -- Harold Geneen in ITT's case -- cannot clone himself. So for the past few years ITT has been gradually disassembled by the following generation of investment bankers.

Not that WorldCom's story will be over once the MCI deal is closed. But if they were underestimated before, Ebbers and WorldCom are getting close to being overestimated. By buying MCI, WorldCom is jumping into the nickel-and-dime, high-marketing-cost consumer market it has avoided up to now. Future gains in margins and market share will be harder to come by. This coming weakness isn't foreshadowed by a weaker stock price because the usual merger-and-acquisitions arbitrage players were so badly burned by the failed BT - MCI deal that they are reluctant to sell WorldCom short.

Another stock that seems ripe for profit taking is Newport News Shipbuilding (NNS). As all you loyal readers will recall, you bought it after the spinoff from Tenneco last year when I recommended it at $13 a share. Now that it is around $24 to $26 and you have nearly doubled your money, why not let someone else make whatever money is left to make? Be generous to the next speculator and sell it.

I saw a headline in Moscow's Kommersant daily about a "Bill Gates -Satan deal." Any customer or competitor of Microsoft may have wondered about such a deal in the past, but it turns out that the Russians were referring to something entirely different, that is, a Gates contract to use SS-18 "Satan" missiles to launch communications satellites. The cover story about "communications satellites" is all very well, but, if I were Larry Ellison of Oracle, I would buy one of those lasers that the Bond villains have at their disposal, since the U.S. forces won't be able to protect him.