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Telecom shakeout could lead to merger frenzy

With the demise of Sprint and WorldCom's merger imminent, new telecommunications merger deals may be simmering.

With the demise of Sprint and WorldCom's merger imminent, new telecommunications merger deals may be simmering.

This time around, analysts say there may be more companies willing to put themselves on the block than telecommunications titans that are willing to buy. Many of the midsized companies in the market have already merged to the point where they're too expensive for any except see story: Mergers: How big is big
enough? the biggest international giants to acquire them, and the giants now have the chance to be selective.

The collapse of Sprint and WorldCom's $120 billion merger at the hands of regulators in the United States and Europe has thrown a modicum of caution into an industry that has set new records for the size of corporate mergers every few months during the past year.

WorldCom and Sprint simply went too far, most analysts say.

WorldCom at a glance

HQ: Clinton, Miss.  
CEO: Bernard J Ebbers  
Ticker: WCOM  
Exchange: Nasdaq

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Bloomberg (7/7/00)

"That deal was over the line from the beginning," said Scott Cleland, the Precursor Group analyst whose lone bearish predictions on the merger ultimately were proved correct. "There has been a longstanding line in the sand, which is that there are three major companies in a market."

Other deals--whether they're international or between companies that target different sectors of the U.S. market--are still viable, he says.

Much of the early betting on the summer's deals is focused on international players such as Deutsche Telekom or Japan's giant NTT DoCoMo, the wireless unit of NTT. Each has looked for a U.S. foothold but has thus far backed away from any move.

Those companies will also have to deal with U.S. policy-makers, who have called for market-opening policies in Japan and Germany and have threatened to block any acquisitions by companies owned in large part by foreign governments.

Sprint at a glance

HQ: Westwood, Kan.  
CEO: William T. Esrey  
Ticker: FON  
Exchange: NYSE

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Bloomberg (7/7/00)
Analysts say deals could also come among the second-tier megacorporations like Qwest Communications and BellSouth, each of which could be either acquisition targets or bargain hunters themselves.

"As to who's buying who, sometimes you don't know," said Eliot Hamilton, senior vice president of research for the Strategis Group, a telecommunications consulting firm. "Sometimes it's a surprise."

Following are the companies most likely to play a role in 2000's long, hot summer of mergers.

AT&T: Ma Bell has been on an acquisition spree during the past two years and still has to finish digesting cable giants Tele-Communications Inc. (TCI) and MediaOne. The company's wireless division is still filling holes in its network with small buys, however.

AT&T, given its languishing stock, could also be on the receiving end of a merger proposal--a thought once unthinkable for one of the strongest brands in telecommunications, some say.

BellSouth: The smallest of the remaining independent "Baby Bell" local phone companies has its merger radar on, but hasn't yet made any big deals in the United States. The company tried to make a bid for Sprint when WorldCom made its first move but was outbid in the final rounds.

The Bell already owns 3 percent of Qwest, however, and some analysts have speculated that these two companies might try to link hands.

Deutsche Telekom: The German giant has been hovering around the U.S. market for a year or more, if analyst speculation and market rumor is to be believed. The company was apparently deep in talks with Qwest early this year, before US West dug in its heels on a three-way merger.

Recent reports paint the company as interested in Sprint, perhaps preparing a $100 billion-plus bid. Others say the company may be interested in the United Kingdom's Cable & Wireless, which also has a U.S. network presence. Qwest, now finished with a first round of merger headaches, also is not out of the running.

Nextel Communications: The quiet mobile phone company has built a national brand, one of just a few in the United States. It's flirted with WorldCom more than once, and analysts say it's still the logical choice if WorldCom can't have Sprint but still wants a wireless company.

History, and WorldCom's perpetual unwillingness to swallow Nextel's price tag, may keep these two companies apart, however.

NTT: The Japanese giant has the largest market capitalization of any phone company in the world today though it has been slow to expand overseas. It recently agreed to buy Verio, a U.S. Web company, and is facing some friction from national security regulators.

Some analysts see this skepticism as a way to force Japan to open its markets to more international competition, however. NTT DoCoMo, the company's hugely successful wireless phone division, is widely viewed to be interested in VoiceStream Wireless, a small U.S. mobile provider that has surged to national status through a series of recent mergers.

Qwest: Chief executive Joe Nacchio is still smarting from the lost opportunity to strike a deal with Deutsche Telekom, a loss he blamed publicly and bitterly on partner-to-be US West last March.

Now that the US West merger is finished, Nacchio is unambiguously in charge and can make deals of his own again. He's said the company is still too small and has proven he's interested in linking hands across the Atlantic. Some analysts say a matchup with BellSouth, which owns 3 percent of the company, might not be a bad idea.

Sprint: After months of swearing his company could remain independent, Sprint CEO William Esrey fell hard for WorldCom's $120 billion. Regulators on both sides of the Atlantic are nixing this, but most analysts expect Sprint to look elsewhere--and quickly. Deutsche Telekom is today's odds-on favorite.

VoiceStream Wireless: After a series of small mergers, the company has landed on the short list of independent national wireless brands. As such, it's a prime target for anyone looking for a serious U.S. wireless strategy. Analysts say NTT DoCoMo and WorldCom could be likely suitors.

WorldCom: Where does CEO Bernie Ebbers go after his master merger fails? Nobody's quite sure. Everybody agrees the company needs a wireless division, and that could mean Nextel, or even VoiceStream Wireless. The company also could strike deals with overseas giants like France Telecom, which wouldn't reduce competition on either side of the ocean.