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U.S. may block Sprint deal
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May 18, 2000: 12:22 p.m. ET
Justice Dept. staff objects to Worldcom takeover bid on antitrust grounds
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NEW YORK (CNNfn) - Federal officials have formally recommended the government block WorldCom Inc.'s buyout of Sprint Corp., saying it would violate federal antitrust laws, according to published reports.
The recommendation, made by Justice Department staff members to antitrust chief Joel Klein, comes after six months of investigation into the $130 billion merger and poses the first significant threat to the union between the nation's No. 2 and No.3 long-distance telephone providers.
Klein has not taken a formal position on the recommendation, according to Thursday's Wall Street Journal. Justice Department officials did not return several phone calls seeking comment on the report.
Klein, who is still fighting Microsoft Corp. in federal court, is not bound by the findings, and still could give the Sprint (FON: Research, Estimates)-WorldCom (WCOM: Research, Estimates) transaction the go-ahead if both parties agree to significant divestitures of some holdings.
 Klein has invited lawyers from both companies to meet with him and present their arguments for the merger.
The paper said the Justice Department staff, which includes Stephen Axinn, the prominent Wall Street antitrust lawyer hired to serve as a Justice Department consultant during the review process, objected to the merger because it would create a dominant long-distance and Internet switching provider. Following the merger, Sprint/MCI Worldcom would control roughly one-third of the U.S. long-distance market.
The Washington Post also reported Thursday that Axinn recently has developed "deep concerns" about the deal's impact on competition.
Meanwhile, the European Commission has delayed its decision to July 12 from July 4, increasing speculation that Sprint will have to sell its European Internet interests to secure approval. European authorities have expressed reservations about the deal in the past because they believe it would stifle competition in the market for Internet connectivity.
Investors reacted by driving the companies' stocks lower. WorldCom shares fell 1-1/2 to 40-1/2 in afternoon trading Thursday while Sprint lost 1-3/4 to 56-1/4.
Company officials hold fast
MCI Worldcom and Sprint officials reacted to the report by indicating they were still confident the merger ultimately will be approved.
"From the signing of the merger agreement . . . we have known that the government would be called upon to make a decision that takes account of the historical market shares in certain segments of long-distance business on the one hand and the dramatic changes affecting the telecommunications industry on the other," said James Fischer, a Sprint spokesman.
"We believe that the changes in law, in business institutions, in technology, in the competitive landscape and in consumer demand should be determinative and that the merger should be approved," he said.
Fischer also reiterated the company's position that it is willing to sell all or part of its Internet "backbone" to help mitigate antitrust concerns. He said the company currently is in the process of defining exactly what business units are a part of that backbone and separating them into a separate division.
MCI WorldCom inked the deal to purchase Sprint last October, hoping to leverage Sprint's powerful wireless market presence and Sprint's fiber-optic business into telecom powerhouse with over $50 billion in sales.
In a research note, Merrill Lynch analysts Adam Quinton and Linda Mutschler said the staff's concerns should not come as a surprise to investors.
"We believe the market is aware of these issues as other relevant regulatory authorities, particularly the EU, have been focusing on them," they wrote.
"We believe the most likely outcome is that a merger between [Worldcom] and [Sprint] does get completed. We expect WCOM to work with the regulators to address the concerns that have been brought up. We believe that WCOM may need to divest more assets under tighter conditions than originally hoped for. It is also possible the company may be required to divest some long-distance assets in addition to Internet assets." 
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Sprint
MCI WorldCom
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