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".

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Ashdown Group: Training Coordinator - Financial Services

£32000 - £38000 per annum + benefits: Ashdown Group: A highly successful, inte...

Recruitment Genius: Business Development Executive - Affiliates & Partnerships

£20000 - £35000 per annum: Recruitment Genius: This multi-award winning foreig...

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor