WorldCom ruling leads to confusion - Company Business and Marketing

CommunicationsWeek International, July 17, 2000 by Theresa Foley

A reshaping of the U.S. telecoms landscape is expected to follow the meltdown of the $115-billion merger attempt between WoridCom Inc. and Sprint. But there may be aftershocks for months to come, before normal business resumes.

The industry has been left confused by a generally expected but still not fully understood blocking action by the U.S. Department of Justice in Washington DC. Analysts are watching for more mating attempts among big telecoms companies still under pressure to create a global super-carrier to serve corporate multinationals.

But the lessons learned from the failed deal could deeply affect any future proposed marriages.

"[Telecoms operators] were complacent," said Andrew Cray, a senior analyst at Aberdeen Group, a market research and consulting firm in Boston, "thinking they could just get together and control several segments of several multibillion dollar markets."

An AT&T/WorldCom-Sprint duopoly would have controlled more than 80% of the U.S. long-distance and Internet markets, a prospect that alarmed regulators on both sides of the Atlantic. First the European Commission in Brussels said it would consider requiring Clinton, Missouri-based WorldCom to divest Internet assets in Europe before it would approve the deal.

Then the Department of Justice took out an anti-trust lawsuit that effectively stopped the merger, barring an appeal by the companies.

The decision, although clearly signaled when the DoJ summoned counsel from WorldCom to answer the concerns of antitrust counsel Joel Klein, did not at first sight accord with recent decisions to admit combinations of Bell Atlantic Corp. with GTE Corp., and SBC Communications Inc. with BellSouth Corp.

However, those were regional and local access operators--the so-called regional Bells.

WorldCom's acquisition of Sprint, following its takeover of MCI just last year, would have reduced the number of major long-distance operators from four to two in a couple of years.

"The interesting thing we've learned from this action is that regulators will not take a hands-off approach when protecting consumer's interests," said Aberdeen's Cray. "It's a warning signal to anybody who thinks they will merge two dominant players in a market."

WorldCom and Sprint may have been victims of bad timing.

"So far every merger that has been offered up to the regulator Gods has been approved--except the WorldCom-Sprint merger," said Jeffrey Kagan, an independent telecoms analyst in Atlanta, Georgia.

If the merger had been proposed a year or two later when the RBOCs were selling long-distance services in more states, it likely would have been approved, Kagan said.

But what is more certain is that both WorldCom and Sprint are left damaged and vulnerable from the collapsed deal.

WorldCom has no wireless component and Sprint does not have the size required in today's global market. Neither Sprint nor Worldcom would comment on the status of the deal or what the next step might be as of early last week.

"After the ruling from the Department of Justice, we had to look at what the department has said, independently, and determine if we want to litigate or go our separate ways," said Mark Bonavia, a Sprint spokesman. "We will meet at some point and make that determination."

"No comment," echoed World-Com spokesperson Claire Hassett. "We have no news on anything."

Even so, analysts doubt that WorldCom will try to force the deal through by appeal.

Adam Quinton, telecoms analyst at Merrill Lynch & Co. in New York, said WorldCom executives are not willing to sell Internet assets such as UUNet to win European approval.

Both WorldCom and Sprint are now themselves takeover targets, according to analysts. Even Deutsche Telekom's declared offer for mobile operator VoiceStream Wireless Corp. last week was just a stalking horse for the bigger target, Sprint, said analysts.

Joseph Eshoo, an Internet analyst at A.G. Edwards & Sons Inc., of St. Louis, Missouri, said the top five telecoms companies in the United States now are:

* Verizon Communications, New York, the company formed in June by Bell Atlantic and GTE, and which controls a stake in business network provider Genuity Inc.;

* AT&T, the long-time U.S. leader with added cable interests;

* SBC Communications Inc., San Antonio, Texas, which combined its wireless business in April with BellSouth Corp., Atlanta;

* Qwest Communications International Inc., Denver, Colorado, which completed its merger on 30 June with US West Inc. to create an $85-billion broadband venture;

* WorldCom, which owns Internet services provider UUNet.

A few big names such as Level 3 Communications Inc., Broomfield, Colorado, are close behind, along with smaller national players such as Nextlink Communications Corp., McLean, Virginia--which just closed a deal to buy ISP Concentric Network Corp.--and Broadwing Inc., Cincinnati, Ohio, created in 1999 with the merger of Cincinnati Bell and IXC Communications.

To be part of the club of five, a player would need local, long-distance, wireless and Internet components. Each business has a different set of dominant players.