Sprint-WorldCom Merger Death Good for Competitors

The perpetual enemy of the electronic world -- time -- killed the merger between Sprint Corp. and WorldCom Inc. The companies looked at the delay the U.S. Department of Justice (DOJ) antitrust lawsuit would cause and balked, officially calling off the deal last weekThe DOJ last month filed a lawsuit in an attempt to block the merger in federal court. In its 65-page filing in U.S. District Court in Washington, D.C., the DOJ argued that, in trying to merge with Sprint, WorldCom aimed to dominate the telecommunications market. Sprint is a major competitor of WorldCom's. The European Commission also fought the deal.

"I'm thinking what was really the death-knell statement was when the DOJ said they would not get to developing their case against the merger until the next year, after the drop dead date of the merger," said Carl Garland, principal analyst of network services at Current Analysis in Virginia.

At the pace of telecommunications restructuring, next year is an eternity. The U.S. Federal Communications Commission (FCC) maintains a Web page documenting the mega-mergers of recent years: Bell Atlantic Corp. buying Nynex Corp.; AT&T Corp. buying Tele-Communications Inc. (TCI); Qwest Communications International Inc. buying US West Inc.; Bell Atlantic (again) joining forces with GTE Corp. to become Verizon Corp.

"Right now, the players are choosing sides. The game hasn't started yet," said industry analyst Jeff Kagan, based in Georgia. "There's a major restructuring going on in the telecommunications industry. Today the companies are valued in the tens of billions of dollars, tomorrow they'll be in the hundreds of billions."

The Sprint-WorldCom deal was valued at about $US129 billion and would have been one of the largest mergers in telecommunications history. The size of the company that would have been created pushed the limits of U.S. and European regulators.

"Every other deal has been done, every other deal was approved. This was blocked because it pushed regulators out of their comfort zone," Kagan said, adding that what is unpalatable to regulators today might be acceptable tomorrow. "If this was a year from now, when Baby Bells were selling long distance in several states, this wouldn't have been an issue."

Kagan sees a telecommunications future in which every one of the major competitors offers every kind of telecommunications service -- voice, data, Internet, wireless and broadband. Those companies right now include SBC Corp., Qwest, Bell South Corp., WorldCom and Verizon. All have aggressively pursued growth, partnerships and mergers to strengthen their communications portfolios.

In the process, several of the vendors have become dominant forces in particular market segments, said William Esrey, Sprint's chairman and chief executive officer (CEO), in a New York speech four months ago, the transcript of which is available at the company's Web site.

"With its most recent purchase of MediaOne (Group Inc.), AT&T, which is already the nation's largest long-distance carrier, will become the nation's largest cable operator with a 60 percent share of the market," he said. "The Bell monopolies, which once numbered seven, have consolidated down to three. Two of them, Bell Atlantic-GTE (now Verizon) and SBC, will control two-thirds of the nation's local phone lines."

But few shopping expeditions compare with WorldCom's buying binge, which has brought at least 60 companies into the WorldCom fold. In particular, WorldCom owns UUNet Technologies Inc. and its Internet backbone, and also swallowed MCI Communications Corp., which at the time of its purchase was the second-largest long-distance carrier. For a time, the merged company was called MCI WorldCom, but the name was recently changed legally back to just WorldCom.

For all the buying frenzy, wireless remains WorldCom's missing secret ingredient. The acquisition of the Sprint PCS wireless network was meant to change that for WorldCom, which made no secret of eyeing Sprint largely because of its wireless services.

But the DOJ and other regulators expressed concern about overlapping areas of strength, including long-distance and Internet backbone services. When the lawsuit was filed, DOJ officials said that concessions suggested by the companies during merger talks did nothing to allay the concerns of regulators.

"If WorldCom would have just bought Sprint's wireless business, it probably would have been all right," Kagan said.

Both companies denied that the merger would chill competition. Even up until Thursday, they were arguing just the opposite.

"We very much regret that our merger with Sprint was not allowed to proceed. The benefits of this merger were clear and compelling," WorldCom President and CEO Bernard Ebbers said in a statement. "Opposition to this merger just adds to the list of Kennard-Klein policies that ultimately will reduce innovation and choice, and raise the cost of communications services, for residential customers, particularly those in rural America."

William Kennard is the FCC chairman and Joel Klein is the head of the DOJ antitrust division.

Whatever Ebbers' view, investors reacted favorably. WorldCom shares closed up 3.4 percent at $47.93 per share in trading Thursday on the Nasdaq Stock Exchange. Both Sprint PCS and Sprint FON closed up slightly as well in trading on the New York Stock Exchange.

However, the failed merger sets both companies back and will benefit the competition, according to analysts from Dataquest, Inc., a Gartner Group Inc. subsidiary in California. Sprint already has been hurt because some employees, including senior managers, have left the company because they had no desire to work for WorldCom.

"AT&T is the big winner here," said Alex Winogradoff, principal analyst in Dataquest's Telecommunications and Networking Group in a written statement issued after the companies announced that the merger is off.

"AT&T increased its rates at an opportune time while WorldCom and Sprint executives are pondering their future; while their shareholders wonder what is next; and while their customers both large and small become concerned about their stability and focus," he said in the statement. "AT&T has just been handed a great piece of marketing propaganda."

Even before the deal was scuttled, rumors flew about possible new suitors for Sprint. The mere announcement from the DOJ that the agency intended to file suit, ignited speculation that Deutsche Telekom AG was next in line. The former German national monopoly wants to boost its international presence through acquisitions. Published reports have said that Deutsche Telekom has its eye on Sprint.

"It would be a very good fit for a company like Deutsche Telekom that wants to (establish) a U.S. presence," said analyst Garland. "There was a lot of consolidation in the industry and Sprint has not been a part of that. They are beginning to look small compared to its competitors."

Sprint, of course, disagrees.

"Sprint is not for sale," said James Fisher, a Sprint spokesman. "We're going to continue to concentrate on our high-growth areas ... wireless and data communications. We feel we're well positioned."

Analysts remain unconvinced.

"No company is for sale until a company makes an offer they can't refuse," Kagan said. "They said they weren't for sale before the WorldCom deal. I think they're going to be bought before the echo dies."

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