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How Salomon played a big part in WorldCom's creation

If WorldCom's bid succeeds then it will mark another stage in its remarkable relationship with Salomon Brothers. Although the US investment bank appears on the credits as WorldCom's adviser, it would be more accurate to describe Salomon as its creator.

Salomon was instrumental in WorldCom's emergence a decade ago, helping arrange its Wall Street flotation, it has advised on all the major deals that have propelled WorldCom up the ranks of US telecom operators and if the latest daring bid succeeds it will be $100m the richer in fees.

But the bank also has another vested interest in seeing MCI fall, not to BT but to WorldCom, since Salomon is also sitting on a huge arbitrage positions that could cost it $100m.

When WorldCom embarked on its dramatic expansion into the US phone market under president Bernard Ebbers, Salomon provided the guidance. The bank was also the adviser to MFS, the local telephones group, and was instrumental in bringing the company together with WorldCom in last year's $14bn merger.

WorldCom's biggest gamble, the takeover bid for MCI, would also solve some of Salomon's problems.

The bank is believed to have built up a $500m arbitrage position by exploiting the gap between MCI's share price and the value of BT's cash and shares offer for the company. When BT renegotiated the deal in August and secured a lower price, the gamble went wrong for Salomon and several arbitrageurs, including the billionaire speculator George Soros.

When WorldCom's bid burst into the open on Wednesday, however, MCI's share price leapt by 20 per cent, taking much of the pressure off the speculators.

It was unclear yesterday whether Salomon had unwound its entire position before WorldCom's bid. Tom King, Salomon's managing director, who helped to arrange the offer, declined to comment. "We don't disclose this and we're not required to," he said last night.

One City trader said: "It's unlikely they would have totally unwound the whole position. If they'd stuck with MCI shares then Salomon's would probably have made back most of what they'd lost."

Salomon also came under scrutiny following the shock profits warning issued by MCI in July. Jack Grubman, Salomon's New York based telecoms analyst, urged that the two companies keep the deal together, telling investors in a note that there was "no deal risk whatsoever."

Mr Grubman and Mr Ebbers have also had a close working relationship for many years. Last December the WorldCom president was given first billing at an industry conference chaired by Mr Grubman, who opened the proceedings by congratulating Mr Ebbers on his "vision and boldness".