WASHINGTON (05/21/2000) - Staffers at the Department of Justice's antitrust division are opposing WorldCom Inc.'s $115 billion bid to buy Sprint Corp., dealing a severe setback to the deal that aimed to create a long-distance and Internet powerhouse. Assistant Attorney General Joel Klein has not yet formally decided whether to accept the staff recommendation and go to court to block the deal, but analysts and attorneys familiar with the case say the companies face an uphill battle to salvage the merger.
In addition, officials at the Federal Communications Commission, which is also reviewing the deal, have suggested that opponents of the merger postpone making further presentations until after the Justice Department weighs in, indicating they expect that the department will oppose the deal. "It's pretty clear this merger is going to get blocked unless the companies can pull bunnies out of a hat at the last minute," says Scott Cleland, an analyst with the Legg Mason Precursor Group in Washington. Sprint and WorldCom officials, including respective CEOs Bernie Ebbers and William Esrey, are expected to meet with Klein in coming weeks to make their case that the merger would not harm competition and should be permitted.
"We believe that the dramatic changes affecting the telecommunications industry - including technology, the competitive landscape and consumer demand - should lead the DOJ to decide that this merger should be approved," a WorldCom spokesman said. "We look forward to the opportunity to present the facts and our views to senior Justice Department officials in the next few weeks." Justice Department officials declined to comment. However, the deal has already received intense scrutiny from the department as well as from the FCC and the European Union's antitrust regulators. In an unusual move, Klein brought in noted antitrust attorney Stephen Axinn last year to oversee his department's review of the merger.
Axinn's team has conducted an extensive review that included an investigation of WorldCom's sale of MCI's Internet business to Cable & Wireless in 1998.
WorldCom agreed to the $1.75 billion sale after U.S. and European antitrust regulators raised objections to its purchase of MCI, but the sale went badly for Cable & Wireless, which sued WorldCom, claiming that key personnel and assets were not included. WorldCom settled out of court for $200 million. The Justice Department demanded information about the 1998 sale from Cable & Wireless under a "civil investigative demand," a powerful compulsion much like a subpoena used in criminal cases. In March, Cable & Wireless agreed to turn over the same information to the FCC.
The fate of that asset sale is important because the proposed combination would meld WorldCom's UUnet subsidiary, the largest Internet backbone provider, with the extensive Internet operations of Sprint, which also is one of the largest backbone companies. The combined companies would carry about half of all Internet backbone traffic and garner 45 percent of the market's revenues, some analysts have said. Sprint officials have offered repeatedly to divest their Internet assets to assuage concerns that the merger would reduce competition for backbone services. But regulators say they remain concerned because of problems that arose in the MCI Net unit sale.
As the companies scramble to address the latest concerns, other suitors could enter the picture. WorldCom was always most interested in Sprint's booming wireless business, so it is possible the companies could seek another buyer - perhaps a foreign telecommunications carrier without major U.S. operations - for Sprint's long-distance business. And if the deal falls apart completely, other carriers would be anxious to make their own bids for Sprint. As one telecommunications industry player put it, "Sprint is on the table - in whole or in pieces."