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Sprint, WorldCom call off $120 billion merger

The ambitious merger between the telecommunications giants, which at the time of its announcement was the largest merger proposal ever, is called off.

It's official. The ambitious $120 billion merger between telecommunications giants WorldCom and Sprint is off.

At the time of its announcement last year, the deal to link the No. 2 and No. 3 long-distance companies was the largest proposed merger ever.

But antitrust regulators in the United States filed a lawsuit to block the merger, and European officials neared filing suit before WorldCom and Sprint withdrew their bid for overseas approval.

Today the two companies formally called off their marriage.

"Sprint is a fine company.

Gartner analysts Jay Pultz and David Neil say that having turned down the WorldCom-Sprint deal, regulators will be faced with other deals that will be no more palatable to them.

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We wish them well," WorldCom chief executive Bernard Ebbers said in a statement. "Opposition to this merger just adds to the list of...policies that ultimately will reduce innovation and choice and raise the cost of communications services for residential customers."

Added Sprint CEO William Esrey: "While we disagree with the conclusions reached by the Justice Department on the competitive impact of the merger, litigation of those conclusions in federal court is not a realistic alternative. Prolonged delay and uncertainty would not be in the best interest of our shareholders, employees or customers."

The Justice Department had identified several issues of concern with the merger, spotlighting the control the new company would have over both the long-distance telephone and Internet-backbone market. Much of the opposition to the merger came from rivals in one of those two markets.

"You would have had the two companies that control a substantial totality of the Internet-backbone traffic," said Scott Marcus, chief technical officer of Genuity, the data-services company recently spun off from GTE. "That would have concentrated too much power in the hands of one player."

Although the deal's collapse has been widely expected since the DOJ made its intentions clear, today's move opens wider the possibility that one or even both companies could become merger targets for another giant.

Sprint in particular has shown its desire to partner with outsiders, though today Reuters reports that Esrey, in an interview on business TV network CNBC, said Sprint is not for sale. At the time of its merger announcement with WorldCom, the company also was speaking to BellSouth, which launched an unsuccessful last-minute attempt to outbid Ebbers.

Most eyes are on Germany's Deutsche Telekom, however. That company has raised a huge war chest of funds with which to launch a merger drive and has had its eyes on the U.S. market for some time. Some reports have indicated the company has already considered a bid worth close to $100 billion for Sprint's hand. Reports today indicate that WorldCom is willing to sell itself and would be a good acquisition target for Deutsche Telekom.

Other reports have painted the German company as interested in alternatives, such as a joint buy of Qwest Communications International and mobile phone company VoiceStream Wireless. That combination would provide a similar portfolio of assets as Sprint, leaving Esrey's company still looking for a suitor.

Any such bid by Deutsche Telekom could face its own strong political opposition, however.

A group of influential U.S. senators has already introduced legislation that would block any company that is substantially owned by a foreign government from acquiring key U.S. telecommunications assets. While that bill is unlikely to pass this year, the leader of that effort wrote to the Federal Communications Commission chairman last night asking him to clarify existing law.

"I urge that you publicly address this issue and put to an end the speculation that such a transaction might be approved," wrote U.S. Sen. Ernest Hollings, D-S.C. "We did not deregulate U.S. telecommunications to permit the regulated foreign government-owned telecommunications companies to take over the U.S. market."