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VoiceStream-DT merger creates political tussle

German giant Deutsche Telekom is buying a wireless foothold in the United States--and stirring up a hornet's nest of political trouble in the process.

German giant Deutsche Telekom is buying a wireless foothold in the United States--and stirring up a hornet's nest of political trouble in the process.

The company's $50.7 billion bid to purchase start-up VoiceStream Wireless, finalized last night, has set off a political chain of events that threatens to upend the rules governing trans-Atlantic business relationships. While the most explosive outcome is still unlikely, the political deal-making sparked by this merger may have effects as far-reaching as the merger itself.

A powerful group of U.S. senators has positioned itself squarely against the merger, arguing that a foreign government-owned company's see related story: D.C. skeptical about foreign buyers purchase of domestic telecommunications assets could upset the balance of competition in the United States and even threaten national security. The German government owns 58 percent of Deutsche Telekom.

In response to the U.S. senators, European Union officials have said that blocking the merger would violate international trade law, and that the EU could in turn pull out of some of the 1997 World Trade Organization agreements governing telecommunications.

"If this is an agreement which one side says it won't honor, then the other side is not particularly obliged to follow" it, said Wilfried Schneider, a spokesman for the EU's delegation in Washington, D.C. "The European Union is concerned. We will have to think about what to do."

Deutsche Telekom's move comes after months of speculation as to where the German company would settle in its ongoing game of merger musical chairs. Rumors had floated about links with virtually every major U.S. company that is--or could be--on the auction block, ranging from Sprint to Qwest Communications International to VoiceStream.

Some press reports had said the company was preparing a $100 billion bid for Sprint, aiming to assemble its own trans-Atlantic powerhouse from the wreckage of the proposed Sprint-WorldCom deal. The VoiceStream bid appears to put that rumor to rest, leaving Sprint looking for another suitor among the increasingly thin ranks of blue-chip buyers.

If approved, the merger will create the first link between an overseas partner and a U.S. company that uses the Global System for Mobile Communications (GSM) wireless technology--the most popular mobile phone standard internationally. That could prove a powerful attraction for customers who travel frequently and will give VoiceStream the opportunity to cut costs as it taps into Deutsche Telekom's buying power.

But all of this is still in the tentative stage, depending on the two companies' ability to navigate what has suddenly turned into rough political waters.

Led by Sen. Earnest Hollings, D-S.C., a group of 29 senators is backing legislation that would bar any overseas company that is more than 25 percent-owned by a foreign government from buying U.S. telecommunications assets. Although the German see story: WorldCom-Sprint merger disconnectedgovernment now owns about 58 percent of Deutsche Telekom, that figure would drop to 45 percent if the VoiceStream deal goes through.

Although this bill has little chance of passage this late in the legislative year, the senators have also added a similar provision to the year's budget language. Under that amendment, the Federal Communications Commission would be barred from spending any money to review a merger involving a foreign government-owned company for a year. For all practical purposes, that would block the deal for Bellevue, Wash.-based VoiceStream for at least a year.

The FCC and its chairman, William Kennard, have been subject to constant congressional criticism in the past several years for the handling of telecommunications mergers. Kennard pledged in a letter to Congress last week that he would give "close scrutiny" to any such deal.

All of this is giving EU officials considerable anxiety.

They point to a 1997 WTO pact that loosened rules governing international telecommunications mergers and partnerships. U.S. negotiators had assured them that this would include public, as well as private, companies. And when that pact was signed, they note, most of Europe's large telephone companies were still almost wholly government owned.

Union officials plan to send a letter of protest to U.S. Trade representative Charlene Barshefsky today, opening up official protest of Hollings' efforts.

Many analysts, who had initially called the senators' effort a "shot across the bow" designed to speed up liberalization of the European telecommunications market, now say that the political opposition is serious. The budgetary language, even though see story: Telecom shakeout brings merger frenzyit has yet to be approved by the full Senate and House, has some serious supporters.

Whatever the outcome of the political tussle, it will likely set precedents for another round of international mergers likely to be on the horizon. France Telecom and Japan's Nippon Telegraph and Telephone are both rumored to be interested in establishing a stronger U.S. foothold. Because both companies have their host governments as part owners, they would likely trigger the same kind of scrutiny now facing Deutsche Telekom.

"The Hollings bill would seek to close (a U.S. legal) loophole, effectively barring any move by most major international players," Donaldson Lufkin & Jenrette analyst Eric Weinstein said in a report today

Nevertheless, most analysts say they expect the political debate to be resolved, allowing Deutsche Telekom to go ahead with its buy one way or the other.

"They're not going to stop this," said Scott Cleland, an analyst for the Precursor Group in Washington, D.C. "But this does put pressure on foreign governments to further open their markets. And that's a good thing."