DOJ files to block WorldCom-Sprint merger

The merger would pose an unacceptable threat to competition in the long-distance and Internet businesses, Attorney General Janet Reno and antitrust chief Joel Klein said at a press conference today.

"This merger threatens to undermine the competitive gains achieved since the (Justice) Department challenged AT&T's monopoly of the telecommunications industry 25 years ago," Reno said.

Also facing growing overseas opposition to their marriage, the two companies said today they would withdraw the merger application now facing review by European regulators. A top European official said yesterday that he would recommend blocking the merger unless significant changes were made to the deal.

"In light of the announcement by the U.S. Department of Justice that it had filed suit to block their proposed merger, (WorldCom and Sprint) have withdrawn their proposed undertakings and merger notification previously filed with the European Commission," the companies said in a joint statement. "If, in the future, the parties decide to proceed with the merger, they will make such notifications as are appropriate under European merger laws."

The Justice Department's decision marks a blow for the two companies' plans to create a mega-carrier that could rival AT&T in size. The merged company, as originally planned, would combine the No. 2 and No. 3 U.S. long-distance companies with one of the top five national wireless phone companies and would control a majority of the U.S. Internet backbone traffic.

The decision also marks the first line in the sand drawn by regulators after approving a series of huge telecommunications mergers over the last two years. Much of the telecommunications business has been deregulated and opened up to new competition, but the action shows that antitrust officials are still wary of allowing anything like Ma Bell's erstwhile market dominance to be recreated.

The two companies declined to speculate on what their next move might be, though both have said they would be willing to sell some, but not all, of their most controversial assets.

"We are disappointed that we have been unable to convince the Justice Department that the merger is in the best interest of the American public and would advance competition," Sprint general counsel Richard Devlin said in a statement. "Over the next several days we will determine our next steps."

WorldCom general counsel Michael Salsbury added in a statement: "WorldCom will promptly review its options with Sprint."

The Justice Department lawsuit, filed in federal court in Washington, D.C., seeks a permanent injunction blocking the merger.

Too much control
Justice Department officials highlighted a half-dozen areas where they said allowing the two companies to merge would violate antitrust law, including:

• the U.S. long-distance market, where Sprint, WorldCom and AT&T together control about 80 percent of the market;

• the Internet backbone market, where WorldCom holds about 37 percent of the market, and Sprint controls about 16 percent of traffic;

• long-distance services between the United States and overseas nations, where WorldCom and Sprint together have about 30 percent of the market, and the "Big Three" carry about 80 percent of traffic;

• international private telecommunications line services, where the two companies would have about 37 percent of the market and a monopoly on private line communications between the United States and at least 12 other countries;

• and custom corporate network services for large U.S. businesses, which the DOJ said was dominated by the "Big Three" phone companies.

Sprint's Devlin said the antitrust authorities had failed to take into account quick changes in the telecommunications markets in the past several years, such as the entry of the local phone giants into the long-distance markets. Regulators were instead relying on outdated 1998 market data, he said.

"We also are disappointed that we've been unable to convince the Justice Department to look at the dramatic changes occurring in the telecommunications market," Devlin said. "We look forward to seeing the complaint because we don't understand the government's case."

Break up to merge?
While likely devastating for the merger as originally planned, the news is not unexpected. Analysts have been warning of DOJ opposition for months, and even company executives have been speaking publicly about regulatory opposition in recent weeks.

Internal company sources have told Bloomberg News that WorldCom might be willing to sell Sprint's long-distance and Internet businesses in order to appease regulators' concerns, keeping the Sprint PCS wireless business to fill its own lack of a mobile phone division.

Some analysts have said that Germany's Deutsche Telekom, which has been looking for a foothold in the United States, would be a likely bidder for the other assets. But that scenario would take some time to play out, analysts said.

"I think some dust would have to settle before we get some bids," said Susan Lynner, a financial analyst with Prudential Securities. "People will want to know exactly what they're bidding on."

The companies will have to convince regulators that a pared-down Sprint could compete effectively against AT&T and a bolstered WorldCom, however--and that could be difficult, analysts said.

"There was nothing (the companies) could have done," said Gartner research fellow Ken McGee, predicting that the merger is now dead. "WorldCom was already under the microscope. It didn't matter what Sprint would divest."

Wall Street had mixed reactions to the news, sending WorldCom up at midday trading, but sending Sprint down several points. Credit Suisse First Boston downgraded WorldCom's stock today to a "buy" from "strong buy," while Kaufman Bros. raised the stock to a "strong buy."

The Justice Department lawsuit, filed in federal court in Washington D.C., seeks a permanent injunction blocking the merger. It's the largest merger challenge ever mounted by regulators.

"Other carriers have entered the market on a much smaller scale," Klein said. "But none has produced beneficial effects on competition comparable in magnitude to the effects produced by competition between WorldCom and Sprint, and between those companies and AT&T."

News.com's Sandeep Junnarkar contributed to this report.