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Hanging up on the WorldCom-Sprint merger

Though the $115 billion acquisition of Sprint by WorldCom proved too problematic for U.S. and European regulators, analysts expect the failed deal to kick off a new round of megamergers.

The largest proposed telecommunications merger is dead. Long live the big merger.

Though the $115 billion acquisition of Sprint--America's No. 3 long-distance company--by No. 2 WorldCom proved too problematic for antitrust regulators in the United States and in Europe, analysts expect the failed deal to kick off a new round of megamergers, continuing a long trend of consolidation in telecommunications. In their urgent quest for scale, network operators will remain on the hunt for partners to help fill the holes in their increasingly global strategy.

"Mergers and acquisitions will stay on a pretty good pace. I think we will eventually end up with a handful of top-tier, U.S.-based companies dominating the market," said Michael Smith, lead telecommunications analyst at Stratecast Partners, a Philadelphia-based consulting and research firm that is part of San Jose, Calif.-based Frost & Sullivan.

Sprint and WorldCom re-enter the merger market with the same wish list they had when they signed their original merger agreement nine months ago. WorldCom, by some accounts, walks away from the failed merger a stronger company having won over some of Sprint's big-ticket multinational customers. And WorldCom CEO Bernie Ebbers, architect of some 70 acquisitions during the past decade, may feel somewhat deserving in the wake of his Sprint rebuff and plunge ahead with impunity, perhaps laying claim to BellSouth, the yet-to-be-spoken-for regional Bell telephone company.

Sprint, meanwhile, to sustain its value as a takeover target, must quickly line up a new buyer. Possible suitors include the deep-pocketed Deutsche Telekom of Germany, or, as some suggest, Qwest Communications International, the No. 4 long-distance company in the United States.

Though neither Sprint nor WorldCom have called off the merger, industry watchers say this could be just be a formality, and the deal is likely to officially die this week. Sprint maintains it is still looking for a way to patch things together, which may merely display a good-faith effort aimed at deflecting a shareholders' lawsuit, experts say.

Doomed from the start?
The WorldCom-Sprint deal, however, may never have been fixable. Antitrust experts say that the merger would have reduced the U.S. long-distance industry to a two-competitor market from a three-competitor one--a factor that sparked a lawsuit by the U.S. Department of Justice and made the merger untenable.

For European regulators, a major concern was the combination of the WorldCom and Sprint Internet operations. The proposed sell-off of Sprint's long-distance operations and Internet backbone, while addressing the market-share problem, was far too impractical, says Charles Biggio, an antitrust lawyer with Akin Gump Strauss Hauer & Feld in New York and a former Justice Department official.

"The messages from the antitrust division seem to be saying, 'Radical divestitures would split the company up in a way that is too risky,'" Biggio said.

Whatever Sprint and WorldCom agree to sell, they would have to sell it in six months to a viable company that could compete on brand recognition and service quality. "That's a pretty daunting task," Biggio said.

Several weeks of discussions between the companies and antitrust officials had produced few positive signs, according to people familiar with the negotiations. A major hitch in the talks was that WorldCom's Ebbers made it clear he would not part with his highly prized UUNet Internet division. That rigidity didn't help the process. In fact, it probably served as one more reason for the Justice Department to pursue another agenda, said regulatory analyst Scott Cleland, who works with the Precursor Group.

"We knew the Department of Justice staff were listening to the companies because they wanted to flush out the companies' best arguments," Cleland said. "This usually serves as a way of previewing the court case. You're basically hearing a mock trial of the other person's arguments."

Although regulators on both sides of the Atlantic were clearly concerned about the WorldCom-Sprint merger, Wall Street misread the signals. The financial community is notoriously bullish on nearly all deals, and WorldCom-Sprint was no exception. But analysts may have put too much faith in Ebbers and ignored the signs coming out of Washington, Cleland said. It wasn't until some rather unappetizing options were floated around that some company analysts started to sense the deal was faulty.

"Theoretically, every deal can get done, it's just a matter of how many concessions need to be made," said Richard Klugman, a telecommunications analyst with Donaldson Lufkin & Jenrette. "In this case, if WorldCom had to gut Sprint to acquire it, I'm not sure it would have been worth it."

Who's next?
So now it's on to the next deal. With Qwest having closed its merger with Denver-based regional Bell US West last week and GTE and Bell Atlantic officially together under the new name "Verizon," the next stage of telecom courtship is ready to begin, and the field is wide open.

"Literally every telecommunications company in the U.S. is in play right now, except SBC Communications and Bell Atlantic (Verizon)," said Stratecast's Smith.

WorldCom staggers or swaggers, depending on how you view it, into this market still on the hunt for a national wireless network. Conventional wisdom puts Reston, Va.-based Nextel Communications and Bellevue, Wa.-based VoiceStream Wireless at the top of the list of desirable targets.

But BellSouth, with its extensive domestic and international wireless properties and its local network, make a compelling fit for WorldCom, analysts say. Even more attractive are BellSouth's plans to lump its wireless operations together with those of SBC. If WorldCom could gain a stake in any or all of that configuration, it would have one of the largest wireless operations in the country, second only to Verizon's. The overlap would be minimal and regulatory scrutiny far less discouraging.

Meanwhile, Sprint may be starting to speak in a few international tongues. Reports of Deutsche Telekom conducting talks with Sprint have been numerous and are unlikely to end soon.

The curtain is rising on the global stage of telecom mergers, says G. Anandalingam, who teaches information management at Wharton.

"You're beginning to see Deutsche Telekom and France Telecom coming into the picture and trying to buy U.S. companies in order to sell services in the American market to expand their own scope," he said. "This will be the next wave of consolidation."

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