Bell Atlantic-GTE Proposal: A Model Merger?

The FCC is talking increasingly tough when it comes to pending mergers. Rather than scaring off companies, this approach is inspiring them to look for increasingly clever and circuitous methods to appease regulators. The most recent are Bell Atlantic and GTE, who are proposing spinning off their Internet divisions as an independent company.

Bell Atlantic and GTE are in a bind over their merger. Although Bell Atlantic has won approval to sell long-distance services in some markets, is prohibited from selling long-distance services in most of its territory. Owning GTE's backbone, which carries long-distance traffic, would violate the terms of the Telecommunications Act of 1996. According to Bell Atlantic, the companies came to the FCC with a proposal to spin off the GTE Internetworking division after the companies' first meeting with regulators, because of FCC disapproval.

The proposal would transfer GTE Internetworking into a public corporation, of which the merged GTE Corp.-Bell Atlantic Corp. would own 10 percent with an option to increase ownership in the future. Spinning off the Internet divisions as a separate company could be a perfect answer to regulatory concerns, and provide a model for other troubled mergers.

An obvious opportunity would be the MCI-Sprint merger, the largest merger in corporate history. Publicly the FCC has expressed concerns with the merger, and a memo recently leaked by the FCC, apparently by accident, expressed specific concerns with the merger of the two company's Internet holdings. Tom Krattenmaker, research director in the FCC Office of Plans and Policy and one of the FCC's top regulators, wrote the memo. In the document, he wrote, "If WorldCom wants to acquire Sprint's Internet backbone facilities, I believe there is a strong presumption against the transfer."

Such qualms are unsurprising. When WorldCom acquired MCI's Internet backbone facilities in its last major merger, the FCC, the European Union and the Department of Justice required it to spin off that business, which was then acquired by Cable and Wireless. That deal has been criticized; customers have complained about Cable and Wireless' service, and C & W itself has sued WorldCom for allegedly undermining its ability to effectively run the network it bought.

Also problematic to the FCC and others is possibility that the merged company would dominate Internet access points. According to the Communications Workers of America, 85 percent of all Internet traffic from Europe to the U.S. comes through the MCI WorldCom network access point in Washington, D.C. Sprint is the only other provider to hold direct control of a network access point for Europe.

Could the Bell Atlantic-GTE proposal provide a model for WorldCom and Sprint?

Possibly, but the circumstances are not quite the same. The FCC would probably not want WorldCom to have the option of buying back the Internet backbone facilities, once it went to the trouble of insisting that the company divest itself of those holdings. But simply selling off Internet assets - as WorldCom did when it merged with MCI - has proven of little benefits to consumers. Bell Atlantic may have found the better way.

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