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News > Deals
WorldCom hangs up on EU
June 27, 2000: 4:28 p.m. ET

After U.S. files suit, WorldCom halts European review of $129B Sprint deal
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - WorldCom Inc. pulled its $129 billion acquisition of rival Sprint Corp. from the European regulatory review process Tuesday, just hours after U.S. regulators went to federal court to block the proposed union.

The two U.S. long distance companies said they had withdrawn from the European Union merger review process "in light of" the U.S. Department of Justice's decision to file a lawsuit Tuesday morning, requesting that the deal be halted due to antitrust concerns.

The withdrawal does not prohibit the two companies from seeking EU approval of the merger at a later date. The merger remains active in the U.S. review process, although the companies declined to comment Tuesday on the deal's future in light of the objections raised by U.S. regulators.

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graphic CNNfn's Diana Muriel reports on what's ahead for WorldCom and Sprint.
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Earlier in the day, the Justice Department filed a lawsuit in U.S. District Court in Washington, requesting that the merger -- which proposes to marry the No. 2 and No. 3 U.S. long-distance providers -- be blocked because it would not only harm competition in the U.S. long-distance market, but also stifle the technological innovation that has driven the Internet's growth.

"This merger threatens to undermine the competitive gains achieved by this department when it challenged AT&T's telephone monopoly [20] years ago," U.S. Attorney General Janet Reno said. "If this deal were to go forward, consumers and business would pay the price because telecom services would be reduced in many important telecommunications markets." (683K WAV 683K AIF)

The EU has been equally as adamant in its objections, although for slightly different reasons. The agency was widely expected to vote against the merger, possibly as early as tomorrow, because of fears that the combined entity would gain a dominant hold over the European Internet backbone.

graphicNews of the withdrawals sent Sprint (FON: Research, Estimates) shares spiraling. The company's stock, up earlier in the day, closed down 1-3/16 to 58-3/8 Tuesday, while WorldCom (WCOM: Research, Estimates) climbed 2-1/8 to 39-5/8.

Analysts called the decision to pull out of Europe little more than a tactical ploy on WorldCom's part to buy some time and review its options. While the Justice Department is not operating under any time constraints, the EU was committed to issuing a ruling by July 12 and a "no" vote would have scuttled the deal for good.

By pulling the offering, WorldCom and Sprint can now continue negotiating with the Justice Department and possibly reapply later to the EU once a suitable compromise is reached.

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But whether the Justice Department remains open to substantial negotiations following its decision to file suit Tuesday remains to be seen.

Some antitrust experts now believe the Justice Department and EU actions could effectively dismantle a deal that, at the time of its announcement, promised to be the richest merger in history and create an international telecom powerhouse rivaled only by No. 1 U.S. long distance company AT&T Corp. (T: Research, Estimates).

Should that happen, analysts believe both Sprint and Worldcom would become acquisition targets themselves. Several European firms are reportedly already salivating over the idea.

"The Justice Department hasn't really come to Worldcom and said to them exactly what they would want them to do to get this deal through, which indicates to me [that] Justice is serious this time," said Bruce Roberts, senior telecom analyst with Dresdner Kleinwort Benson. "I don't think they really want to see this deal happen.

"What I think is going to happen at the end of the day is I would imagine that Worldcom maybe backs off here, decides it needs a wireless network and maybe goes from there," Roberts continued.

Lawyers representing both Sprint and WorldCom had released statements Tuesday morning indicating the companies intended to review all their options.

"We are disappointed that we have been unable to convince the Department of Justice that the merger is in the best interest of the American public and would advance competition," J. Richard Devlin, Sprint's general counsel, said in a prepared statement. "Over the next several days, we will determine our next steps."

graphicCurrently, AT&T is the nation's No. 1 long-distance provider controlling roughly 44.5 percent of the market, followed by WorldCom, controlling 26.1 percent, and Sprint, holding 9.7 percent. Justice Department officials argue that narrowing that group to two companies would leave telecom customers of all sizes exposed to higher prices in the future.

"At its core, this is a three-to-two merger and the kind of merger that would harm a wide range of consumers and businesses," said Joel Klein, assistant U.S. attorney general.

Devlin said the company was looking forward to seeing the DOJ complaint "because we don't understand the government's case." Devlin said in recent discussions, the DOJ "insisted" that the company would have to divest Sprint's U.S. long distance business and its local telephone operations to gain regulatory approval.

Sprint and Worldcom both have argued that although the merger would narrow long-distance competition in the short term, the telecommunications industry's rapid evolution from wireline phone operations to digital and wireless offerings has actually introduced a whole new competitive landscape that will only grow the coming years.

The companies have also pointed to recent Justice Department decisions approving mergers between Bell Atlantic Corp. (BEL: Research, Estimates) and GTE Corp. (GTE: Research, Estimates), as well as one between SBC Communications (SBC: Research, Estimates) and Ameritech.

Those two entities will soon control roughly two-thirds of the local access lines in the United States. In addition, federal regulators recently allowed Bell Atlantic to begin selling long-distance service in New York, where it is rapidly snapping customers away from the Big 3 providers.

But the Justice Department has proved more wary of allowing consolidation in the long-distance arena because there are fewer proven competitors.

"In the telecommunications industry, bigness still matters," said Fred Marcusa, an antitrust expert with Kaye Scholer Fierman Hays & Handler. "I'm not sure these companies could have done much different because their problems are structural."

Still, some analysts chided the regulatory agency for taking what they called a short-term view. 

"Justice may know a lot about justice, but it's painfully obvious to me that they know nothing about telecoms," said Anthony Ferrugia, an telecommunications analyst with A.G. Edwards. "Justice is taking a historical perspective, which is exactly the kind of perspective that would probably get me in deep trouble and perhaps even fired if I was looking at the industry on that basis."

Offer to sell Internet to no avail


Worldcom's previous experience with U.S. and European regulators from two years ago, when it acquired long distance provider MCI for $40 billion, clearly hasn't helped the company's cause either.

Shortly after the merger was announced, Sprint and WorldCom offered to sell Sprint's Internet backbone, hoping to alleviate the concerns of European regulators. But U.S. and European regulators still have a bad taste in their mouth from WorldCom's previous merger with MCI two years ago, according to a source with knowledge of the transaction that asked not to be named.

As part of those merger negotiations, WorldCom agreed to sell MCI's Internet operation as well, but was sued by the ultimate buyer, Cable & Wireless PLC, for stealing customers and withholding information.

"They knew they were pushing the envelope with this from the beginning," the source said.

Klein said that after reviewing the merger's impact on seven or eight major U.S. markets, the U.S. Attorney General's office concluded there was no resolution that the parties had proposed that ensured continued competition in several telecommunications arenas.

"For us, there really was no way to square the circles and resolve the issue," he said. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.