The Dutch banker sipped a soda and gazed across the posh hotel meeting room. Just days before, hundreds of thousands of the Dutch people had taken to the streets to protest the nuclear arms rhetoric coming from Washington.
But on this day, only placards on nearby street corners remained as reminders of that mass march. On this day, he was greeting the leaders of a relatively small American company, MCI Communications Corp., who had come to sell to a group of Dutch investors the company's prospects and enormous potential.
For Z.O.H.M. Baron Van Hovell Tot Westerflier, general manager of Amsterdam-Rotterdam Bank, N.V., a division of the Amro Bank, a $50 billion bank that is this nation's second largest, keeping up with growing American companies is a major part of his job. Investing in United States firms, even at a time when political relations seem strained, is the backbone of Dutch finance. In fact, more American companies are traded on the Amsterdam Stock Exchange than Dutch companies.
"In general, the Dutch are the most experienced in the American markets of any European investors," he said, estimating that 40 percent to 50 percent of Dutch equity is placed in American investment. "Historically, that has always been the case.
"For Europeans, the U.S. is still a country where there is enormous future potential. Business is considered an acceptable thing. The scope and view is different there. We may disagree on some things, but there is nothing to match the political and social stability of the States."
The Amro official's comments were typical of those heard from both American and European bankers, portfolio managers and brokers during a week-long swing recently through England, Switzerland and Holland. To European investors, the United States remains a land of milk and honey, a model of capitalism, growth and stability that not even a difficult recession can temper.
And for American companies, Europe offers a still barely tapped source of billions of investment dollars, exactly the reason that officials of a growth company like MCI, the booming, District-based long distance communications firm, trekked through four chilly European cities recently in search of both investment in their rapidly rising stock and the possibility of floating a debenture or other debt offering in European markets.
Although it is always difficult to estimate the amount of investment money in wide-open Swiss banks, one Swiss banking executive said that about $35 billion in new reserves were added to that lush country's banking coffers in the last year.
The representative of a major American bank in Switzerland said U.S. companies have only begun coming to Europe in a big way to promote themselves and explore overseas options. "Many American companies don't know what is over here," he said in a restaurant looking onto Lake Geneva. "You're not let in that easily over here. You need to be introduced. But once you are you've got a whole series of new options."
In fact, one Zurich banker, noting the gathering of two dozen investors to meet with the MCI group, said the crowd did not compare with a similar function last week. "Several hundred people came to hear Walt Disney," he said with a smile. "They're very popular over here."
For MCI, which has made European forays on three previous occasions, the European version of the American "dog and pony show" demonstrated that although investors abroad are increasingly aware of American growth stocks and competitive burgeoning industries, a company like MCI--doing something with no equivalent abroad--faces a difficult time explaining itself. "Europeans live by monopoly," said a British banker.
Not surprisingly, then, MCI Chairman William McGowan recalled that in 1975, the then-struggling company's first effort to gain attention for MCI in Europe "was a dismal failure." At present, McGowan estimates that MCI is backed by at least $100 million of European investment; a number of British and Scottish investors who have seen investments in MCI triple in the past year greeted company officials enthusiastically.
If the European investor is increasingly important to American companies, the job of selling American business in Europe has become in itself a big business as well.
Take MCI's first stop in Europe, where the magazine Institutional Investor sponsors a conference in England designed to give American companies an avenue to promote themselves. Held elaborately at the Savoy Hotel in London, the conference attracted close to 300 participants. Each of the 53 companies that presented slides, distributed literature, and doled out cocktails and snacks also paid $9,500 for the privilege, bringing the magazine a neat half million dollars, not to mention advertising and publicity.
The conference attracts participants from throughout Western Europe, and for MCI, in its second year of participation, it has provided an opportunity to speak to about 50 past and potential investors.
For some, it was an opportunity to say thank you. Daniel S. Allsopp, a Scot representing a small group of investors, met McGowan in Washington in 1975. Not long after that, Allsopp got involved in MCI and his investment, which he said may be several million dollars, has tripled.
"For me they have generated loyalty," Allsopp said. "It's been quite a difficult company to follow. But a lot of what we've done we took on faith from Bill McGowan . That's what good judgment is all about. It was quite clear he had an exceptional handle on the opportunities in the business. We had a lot of hand-holding to do, but the things he started telling us came true."
But this is also the story of how a situation developed in which major European banks, like Amro in Amsterdam and Credit Suisse in Zurich, are opening doors and soliciting the business of MCI, a company whose very services are difficult for many Europeans to imagine, a company operating only domestically, lacking a clear international identity, and a firm that as recently as 1976 was on the verge of bankruptcy.
"Things were bad enough to scare most normal people out of their wits," said Wayne English, the company's chief financial officer of that earlier period. "We were showing continuing cash negative operations," mused McGowan, noting that the company had in 1975 $36 million more debts than assets. "We were technically bankrupt."
Further, it is a company competing in the $35-billion long distance business and residential calling market with the world's largest corporation, American Telephone & Telegraph, an entity well-known in Europe investment circles as a safe place for large, long-term investors such as pension fund managers. (European telecommunications activities are run almost exclusively by government-owned monopolies.)
MCI is also traded on the over-the-counter market, a fact that suggests to many Europeans a kind of second rate image. "Most of the big banks in Switzerland hardly ever recommend OTC stock," said one Swiss banker. "But MCI is actively traded and we like to see that here."
MCI's business, in essence, revolves around the multiple uses of its microwave network--essentially a series of microwave towers across the country--that carries voice and data communications. That network now reaches over more than 8,000 miles and serves about 70 percent of the nation's telephones.
Yet, the company is having continuing difficulty resolving its historic disputes with AT&T. Those fights, which date back to the late 1960s when MCI was trying to persuade the Federal Communications Commission to break AT&T's stranglehold over the long distance business, continue today before Congress, which is rewriting the nation's communications laws, and at the FCC, which is overseeing negotiations to determine the costs and nature of MCI's hook-up with AT&T's local telephone network.
Those connections with business and residences are the only way MCI's microwave system can now link users, and the acrimonious negotiations have moved slowly this year.
Congress is considering proposals to redo that complex process, and although MCI's right to compete on reasonable terms is implicit in the legislative proposals, McGowan told European audiences that the company "should not rest" as long as Congress is tinkering with the telecommunications business.
AT&T asserts that its rates are anywhere from 20 percent to 50 percent higher than MCI's because it subsidizes local telephone service with long distance rates and is similarly obligated to keep local rates low. That rate structure is changing and AT&T Chairman Charles Brown pledged recently that AT&T will ultimately be in a position to cut its long distance rates to match those of its competitors.
Today, then, McGowan and three other MCI officials can afford to look beyond survival and toward, for example, the hunt for European investment. MCI's sales will almost double this year from last year's $234.2 million, and the company's revenues are now coming in at a rate of about $600 million a year. It may well be one of the largest companies in the history of American business to double in size in one year and could, within the next two years, become a billion dollar company--one of only a handful based in the Washington area.
MCI's stock has become one of the hottest on Wall Street, trading over the counter at about $35 a share, after trading for as little as $4 1/2 in early 1980 and for 10 7/8 in the first quarter of 1981. "Assuming that the currently multiple environment holds, MCI's common stock in four years will be selling at greater than $100 a share," predicts Paul Mejean, senior vice president of Shearson/American Express Inc., and MCI's lead investment banker.
At the same time, MCI is awaiting an appeals court's verdict, expected imminently, on a jury's award last year of $1.8 billion in an antitrust judgment against AT&T. Meanwhile, the June 1980 judgment is gaining interest at the rate of $3.1 million per week. Most European investors knew of the antitrust case, or at least of the verdict.
But one Swiss banker, told that MCI had charged AT&T with massive violations of antitrust law in failing to give MCI links to the telephone system, asked curiously: "So the image of Mama Bell is overdone?" Asked a Dutch banker: "Is all it takes [to win the verdict] a gentleman with a big black robe named Warren Burger?"
Perceptions notwithstanding, MCI has never been stronger financially. The company has $150 million in cash in the bank and has an unused bank credit line of $200 million. Not long ago the company was heavily leveraged, paying about 28 cents out of every dollar of revenue to debt. That figure is now down to about eight cents of every dollar.
Last summer, the company issued its sixth public offering in the last two and a half years and has raised over $400 million in the domestic capital markets during that period. That most recent offering was apparently the largest ever floated by a B-rated company, $100 million in convertible debentures that were gobbled up by major financial institutions within an hour.
That deal should give the company the financing it needs for most of 1982, a period that includes a capital expenditure program of $400 million. By next fall, company officials say they will need additional external funding, and the trip to Europe was, in part, an effort to sort through the Eurodollar markets to determine whether MCI should move formally into that arena.
Thus, the trip, coming at a time when MCI is riding high,, was launched with two purposes--publicity and research.
"Although the U.S. market is the biggest and most flexible in many ways, we need to know more about Euromarkets," remarked William Conway, MCI's treasurer, before the trip. "The important thing from our standpoint is to get our name known over here," noted English.
The Eurodollar market has become one of the flashier of the world's financial markets. Eurodollars are short term sources of bank funds deposited offshore but in dollar denominations. Last year, almost $19 billion in Eurodollar bonds were issued.
Simply put, there are no registration requirements for the bonds whatsoever and European bankers talk with disdain about Securities and Exchange Commission regulation. "If you're ready, the offering can be on the street within three weeks," said one banker.
Another key part of the pitch is based on the premise that if the proceeds of the bonds are to be used in the United States, companies can completely avoid tax on interest payments by setting up an "offshore subsidiary," preferably in the Netherlands Antilles. That process takes only a couple of weeks and can be done for less than $10,000.
There are several reasons for a company like MCI to move to Eurobond financing. For MCI, it would mean exposing the company to a whole new audience of sophisticated investors from Europe, the Middle East and Asia, Citicorp officials said. Prepayment panalties would also be less than in the United States and rates would be fixed in the Euromarket. Skillful arbitrage or currency conversion could also make the investment even more profitable, depending on the international status of the dollar.
"This," argued the Citicorp representatives--one British and two American bankers--"is a positioning and a tactical exercise. There is a strong bond and convertible bond market over here."
Furthermore, in recent years, American companies have found interest and exchange rate "windows" that have enabled them to make quick decisions, float Eurosecurities and make out like bandits. The list of U.S. companies that have recently issued the type of Eurobond that MCI is considering includes such entities as Anheuser-Busch International Finance, N.V., to J.C. Penney Overseas Capital N.V., which issued $100 million and $75 million in bonds, respectively.
Perhaps those firms are a bit larger than MCI, have higher bond ratings and more experience in world capital markets. But, nevertheless, the size and type of offering were of a kind that ought to appeal to MCI. "We could place a lot of that money quickly," MCI officials were told.
But MCI officials have apparently concluded that the European bond markets are not what they have been cracked up to be. "This is a time to keep your powder dry," said one of McGowan's British associates. MCI officials were told, for example, in most situations in the Eurobond market, MCI would have to finance bonds over seven to 10 years. Domestically, such offerings could be paid off over 20 years, with considerable benefit to a company like MCI.
Further, the world markets' confused interest rate situation, dependent on high, but slowly sliding interest rates here, has made it more difficult for American companies to find that sought-after "window" abroad. "I expected there to be more benefits from the Euromarket," noted Conway, MCI's treasurer, on the way home from his first European trip with MCI.
"Sure we could do a European transaction," he said. "But I've learned, I think, that MCI, 90 percent of the time, is better off in the U.S. capital market."
If Conway and the rest of MCI's small entourage concluded this trip more bullish on domestic capital markets than before, what then is MCI's role abroad? "Europeans," said McGowan, "think of America as a safe haven for their money. There is no way to judge what they think of MCI. But given any opportunity, they'll invest in the U.S."