Legg Mason's Miller Presses For Qwest Bid

By Jerry Knight
Monday, April 18, 2005

Other investors may own more MCI stock, but few have as much at stake in the fight for control of MCI Inc. as Baltimore's Legg Mason Inc.

Usually regarded as a conservative money-management firm, Legg Mason has bet more than $1 billion that MCI will merge with Qwest Communications International Inc. rather than Verizon Communications Inc.

Legg Mason holds 5.6 million shares of MCI stock, which would be worth about $130 million under Verizon's offer and $154 million if Qwest buys MCI. The shares are held by Legg Mason Value Trust, a $10.8 billion mutual fund managed by William H. Miller III, a legend in the money-management business because Value Trust has outperformed the benchmark Standard & Poor's 500-stock index for 14 years in a row.

But Miller and other Legg Mason money managers have made an even bigger bet on Qwest. They own 240 million shares of Qwest, worth well over $1 billion before the stock market turned ugly last week.

Legg Mason's hole card may be its investment in Qwest junk bonds. Legg Mason executives won't say how much they have invested in those.

Public reports show a few million dollars' worth of the bonds in the portfolio of Legg Mason's high-yield bond fund. But the mutual funds are only a small part of the $360 billion managed by Legg Mason as of the end of last year. The Baltimore firm is one of the biggest money managers in the world, directing investments for pension funds, university endowments and other big investors.

Legg Mason's billion-dollar stake in the contest for MCI has cast the firm in the unfamiliar role of player rather than spectator. It is acting more like a wheeling-and-dealing hedge fund than a conservative money manager.

Miller and other Legg Mason executives have spoken out repeatedly in support of Qwest's bid, although the firm last week declined telephone and e-mail requests to make Miller or any other official available to discuss its participation in the fight for MCI.

Legg Mason has not only publicly supported Qwest's bid, it also has offered to help raise the $2 billion Qwest would need to finance it. One of the questions Legg Mason won't answer is exactly how it might participate. There are at least three options: It could act as Qwest's investment banker -- recruiting others to invest in the deal, it could use some of the $360 million in assets it manages, or the firm could put its own money into the deal.

Miller waded into the ring two weeks ago, making public a letter to MCI backing the Qwest bid and making nasty cracks to the media about MCI.

The MCI board is "clearly mathematically challenged," Miller told David Milstead, finance editor of Denver's Rocky Mountain News, Qwest's hometown paper. "There must be a manual lying around MCI on how to destroy shareholder value."

That's harsh language from an erudite money manager known for his thoughtful analysis of economic trends and his meticulous mining of financial reports in search of undervalued companies.

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