Recent reports say regulators from the Department of Justice, the nation's antitrust watchdog, are concerned that an MCI-Sprint combination would create a global communications powerhouse and could squash competition.
A number of other mergers are currently hanging on a yea or nay from regulators. AT&T has been on hold for a number of months in its merger with cable operator MediaOne. America Online is under tight scrutiny for its proposed deal with media giant Time Warner.
These companies in defense of their multibillion-dollar plans say they need to merge to survive. They are also, in some cases, benefiting from federal legislation intended to promote competition in the communications industry.
Yet federal authorities fear consolidation will only limit choice and raise prices for consumers, counteracting the original intention of legislation to open up the industry.
Dozens of traditional communications, wireless and Internet providers have combined forces since the adoption of the Telecommunications Act of 1996--sweeping legislation that aimed to open long-time monopoly communications markets to competition.
Adding to the current stalemate are two federal bodies that might be working at cross purposes. Analysts say that while the Federal Communications Commission preaches deregulation and a "hands off the Internet" approach, the Justice Department is an antitrust buster--two charters that sometimes conflict.
Some analysts believe the MCI-Sprint deal will be nixed by federal trustbusters, or will render the merger unattractive by pinning major requirements and divestitures on the combination.
"I'm going to be shocked if this is going to go through," said Ken McGee, a communications industry analyst at Gartner, a corporate consulting firm. "Competition is certainly not enhanced because three major (long-distance voice) carriers minus one major carrier leaves just two major carriers."
A Justice Department spokeswoman declined to comment on the contents of an internal staff report recommendation that is the current source of skepticism regarding the MCI-Sprint merger. It has not been publicly released.
But sources indicate that the staff report indeed raises serious concerns about the combination of MCI Worldcom and Sprint, two of the nation's largest long-distance voice and Internet carriers. The DOJ's concerns, which stem from combining the No. 2 and No. 3 long-distance providers, could have a chilling effect on future communications mergers.
"I think the DOJ just stopped the music, and there are no more chairs left. I don't think there's any more room for carriers to buy carriers," McGee said.
McGee is confident, however, that the AT&T-MediaOne deal and AOL's proposed purchase of Time Warner will be approved, because those companies independently don't dominate the same markets. According to reports, Ma Bell's MediaOne deal still may be delayed.
Yet Sprint and MCI executives have not given up hope.
"When we signed the merger agreement we knew that the government would take the traditional long-distance market and other factors into its consideration of the deal," said MCI WorldCom spokesman Peter Lucht.
"And we believe the dramatic changes affecting the telecommunications industry, including technological advancements, the competitive landscape, and consumer demand, should lead the DOJ to decide the merger should be approved."
Sources close to the companies said MCI and Sprint have not yet met face-to-face with Joel Klein, the Justice Department's chief antitrust enforcer, best known for his ongoing battle with Microsoft.
Sources also said MCI and Sprint have not yet discussed potential remedies with the DOJ, though Sprint officials have indicated they would be willing to divest Sprint's Internet backbone network if necessary. MCI WorldCom chief executive Bernie Ebbers, however, has indicated he is unwilling to sell MCI's UUNet Internet unit--one of its fastest growing businesses.
ABN AMRO financial analyst Kevin Roe wrote in a research report that today's flurry of media reports concerning a merger hold up were perhaps a "leak" by the Justice Department used as a negotiating tactic.
"Outright rejection of the merger is the most extreme of positions, and there are many intermediate possibilities likely that would include approval of the merger," Roe said. "We continue to believe that (the MCI-Sprint) merger will receive ultimate approval, after concessions, in the fourth quarter."
If the deal is nixed by the DOJ, however, Roe expects MCI to try and acquire VoiceStream, a large U.S. wireless service provider, to fill a longtime void in MCI's telecommunications strategy.