Mergers on a wire

As the pending WorldCom/Sprint and Bell Atlantic/GTE mergers make their way through the regulatory minefield,the two deals are increasingly facing the same issues as America Online/Time Warner and AT&T/MediaOne.

First, regulators in all four cases are questioning the Internet holdings of the proposed mergers. Second, analysts believe each merger can get regulatory approval, but divestiture requirements may make the deals far less palatable than the announcements that originally whet the appetites of the participating companies and investors.

Most precarious is the proposed WorldCom/Sprint deal. Reportedly, the U.S. Department of Justice recently received a recommendation from special counsel Stephen Axinn to block the deal because it violates antitrust laws. Meanwhile, WorldCom representatives are scheduled to meet this week with European Union regulators.

The EU is expected to make its decision in July.

Openly seeking to add a wireless component to its portfolio, WorldCom last year nixed a seemingly done deal with Nextel Communications before agreeing to buy Sprint for about $143 billion. While Sprint's wireless offering is not a problem for the merger, its portion of the Internet backbone and the U.S. long-distance market are sources of concern for regulators.

Without divestiture, a combined WorldCom/Sprint reportedly would control almost half of the Internet traffic and long-distance telephone markets in the U.S.

WorldCom CEO Bernard Ebbers is not willing to divest UUNet, WorldCom's primary Internet backbone unit. WorldCom officials are willing to divest Sprint's Internet holdings, but at least a portion of UUNet will have to be divested to get approval, said Ron Cowles, principal analyst for Dataquest.

"Most of the concessions will have to come from the WorldCom side," Cowles said.

Dealing with regulators is nothing new for WorldCom, which received approval for its merger with MCI less than two years ago. But the circumstances for this merger are much different, said Scott Cleland, analyst for Legg Mason Precursor Group.

"Last time, the EU and the Justice Department were focused on solving the same problem," he said. "The problem this time around is the EU is focusing on the Internet and the DOJ is focusing on the U.S. long-distance market as well."

"Whereas before, this was pretty straightforward.... This is going to be complicated," he added.

Compounding the complexities is the fact that some regulators are displeased that WorldCom did not divest some MCI holdings in the manner promised when that merger was approved, Cleland said.

"The bottom line is, this merger has multiple problems with DOJ and EU regulators," he said. "And they are not eager to help these companies... because they don't trust them. [Regulators are saying,] `Fool me once, shame on you; fool me twice, shame on me.'"

Less problematic is the Bell Atlantic/GTE deal. The companies plan to operate under the name Verizon after the merger, which has been pending for two years as the companies and regulators try to determine a plan for GTE's Internet backbone, which is owned by Genuity, formerly GTE Internetworking.

Because some long-distance calls can be carried on the Internet, federal guidelines dictate that Verizon cannot own more than 10% of the GTE Internet holdings until Bell Atlantic can offer long-distance within its local service territory. While the spinoff for Genuity has been executed - the company filed for an IPO last week - officials for the future Verizon want to ensure the company can regain GTE's Internet properties after Bell Atlantic receives long-distance approval.

With this in mind, GTE and Bell Atlantic have proposed that Verizon retain an option to reacquire up to 80% of Genuity after Bell Atlantic receives long-distance approval in 50% of its local service territory within five years.

AT&T is one of plan's critics, some of whom describe the proposal as a "sham." If Verizon is virtually assured future ownership of Genuity, no divestiture exists and Genuity will not act as an independent company, said Jonathan Askin, general counsel for the Association for Local Telecommunications Services.

"The way GTE has framed the proposal, Verizon will still maintain significant ownership in Genuity," Askin said. "They're basically playing a shell game. They still have significant representation on the board.

"There's not a single intelligent Genuity board member, executive or employee that's not going to be looking over their shoulder at what Bell Atlantic/GTE [Verizon] is doing," he added. "There's not a single move they're going to make that's not going to benefit Verizon, knowing that five years down the road they'll be owned by that company."