D.C. skepticism mounts about foreign telecom buys

Earlier this week, a handful of U.S. senators introduced a bill that would block any company that is more than 25 percent-owned by a foreign government, such as Deutsche Telekom, from acquiring U.S. telephone companies.

According to reports, Deutsche Telekom, which is still nearly 60 percent-owned by the German government, is preparing a new bid for Sprint that could total close to $100 billion.

The group of senators is worried that government-owned companies are protected in their home countries and, as a result, could wind up having an unfair business advantage in the United States. As the merger between Sprint and WorldCom appears ever closer to collapse, this issue seems likely to have new relevance in the coming weeks, analysts say.

"While our own efforts to foster competition have benefited consumers, they have depressed the earnings and stock prices of U.S. domestic companies," said Sen. Earnest Hollings, D-S.C., introducing his bill. "In promoting the competition at home, we may be facilitating the ease by which foreign, protected players may emerge with key U.S. assets."

Analysts and congressional pundits say this particular bill is unlikely to go far. But it does highlight a growing tension between some policy-makers in the United States and European regulators, who have been instrumental in undermining the proposed merger between Sprint and WorldCom, some analysts say.

Communications law dating back to 1934 requires the Federal Communications Commission to give special scrutiny to any telecommunications purchases being made by foreign companies. Under a 1997 World Trade Organization agreement, FCC rules generally look at such buys with a benign eye if they are coming from other WTO countries, unless they "(pose) a very high risk to competition."

In the late 1980s, worried about then-rapid Japanese corporate expansion in the United States, Congress created a separate national security review of U.S. acquisitions by foreign companies.

Under that law, a Treasury Department task force conducts a closed-door review of foreign investments in U.S. network infrastructure companies. The process, which remains almost entirely secret unless the companies themselves disclose it is under way, can take up to 90 days.

If the task force has serious concerns about national security, the law allows the president to delay or block any merger or acquisition. But analysts say this has rarely been invoked and would be extremely unlikely to happen in the case of a Deutsche Telekom acquisition in the United States.

"The U.S. government would not want to create a precedent that could trigger retaliation against U.S. attempts to purchase foreign (telephone companies)," Prudential Securities analyst Susan Lynner wrote in a report earlier this week.

Hollings, the ranking Democrat on the powerful Senate Commerce committee, believes this safeguard is not enough, however. He and the five other Democrats who introduced the bill want a complete ban on investment by companies that are at least quarter-owned by foreign governments. European countries such as Spain and Italy have blocked acquisitions on similar grounds, and it's only fair that the United States follow suit, he said.

The clock is ticking
The senators may have to act quickly if they want their bill to have the desired effect, however.

The $120 billion merger deal between Sprint and WorldCom appears to be collapsing under strong opposition from the U.S. Justice Department and European antitrust regulators. If it does go forward, WorldCom will have to sell substantial parts of Sprint to satisfy antitrust concerns.

Sprint executives have said they're still committed to making the WorldCom deal work in some form, however.

Congress is rapidly approaching a summer holiday and election season, which means it has little time left to pass any critical legislation this year. This alone is likely to kill Hollings' proposal this year, analysts say. U.S. telecommunications companies are likely to oppose it for fear of triggering retaliation abroad, some add.

But Hollings has also raised an issue that may have more staying power. In his speech to Congress this week, he raised questions about European government regulators blocking U.S. mergers in such a way that would benefit companies owned in large part by the European governments.

In the case of both WorldCom and the proposed America Online-Time Warner merger, this dynamic is likely to boost tension between U.S. policy-makers and overseas authorities, analysts say.

"I view this as kind of a shot across the bow," Prudential's Lynner said. "The European Union's involvement in the WorldCom deal may be something to make people look harder at how the EU is using that authority."