What appeared to be the simple registration of a domain name on the Internet has led to an object lesson in premerger publicity, and has cast a shadow over a soon-to-be-completed merger.
Just three days before MCI WorldCom struck a deal to acquire SkyTel Communications Inc., an online subscription news service called Company Sleuth reported that the domain name "skytelworldcom. com" had been registered with Internet authorities. Investors interpreted the development as a sign that a merger was in the works, and pushed SkyTel's stock to $21.88, an increase of 16 percent.
Then came what some interpreted as a denial. When MCI WorldCom was contacted about the domain name, a spokeswoman read the following statement to reporters: "From time to time, MCI WorldCom employees, sometimes acting on their own initiatives, register domain names they believe may be potential targets of domain-name squatters. In this case, the action is not an indication of official company inten-tion." However, when queried about a pending merger, the spokeswoman refused to comment.
Investors reacted to the domain-name statement by dropping SkyTel's share price to $18.69. Three days later, MCI WorldCom announced it would buy SkyTel for $1.3 billion, or about $21.50 a share.
Soon a shareholders lawsuit was filed in U.S. District Court for the Eastern District of New York alleging that MCI WorldCom influenced the price of SkyTel stock by denying reports of the acquisition. At about the same time the lawsuit was filed, reports began to circulate that the SEC had opened an investigation into the situation.
According to Patrick Coughlin, a partner with Milberg, Weiss, Bershad & Lerach LLP, in San Diego, a company may avoid allegations of misleading the public, if it's not trading in its own stock, by refusing to comment on an action--such as a merger--that may influence stock prices. "But if a company chooses to comment, it had better be truthful," he adds. "Sometimes people think, 'People are talking about this merger, and that's going to screw it up. But the deal's good for the company, so we'll just tell people we're not doing it.'"