Warning: Bumpy road ahead

Opposition to DT/VoiceStream deal voiced at Capitol Hill hearing Deutsche Telekom took the first regulatory step in getting its $50 billion purchase, U.S. -based VoiceStream Wireless, but a subsequent congressional hearing exposed the political gauntlet that the German government-owned telecom giant must survive to make the deal a reality.

Opposition to the deal was led by Sen. Ernest Hollings, D-S.C., who reiterated his belief before the House Subcommittee on Telecommunications, Trade and Consumer Protection that DT should not be allowed to buy VoiceStream because the German government owns a 58% stake in the company, well in excess of the 25% threshold allowed by federal law. However, the FCC can waive the law if it deems a deal to be in the public interest, an option the commission has exercised several times in cases involving companies from World Trade Organization countries.

FCC Chairman William Kennard testified that the commission assumes a "rebuttable presumption" that deals involving WTO governments are in the public interest, although there are two caveats.

"If there is a very high risk to competition domestically, we would not approve the merger," Kennard said. "If there are national security issues involved, we would not approve such a merger."

While Kennard believes the current regulatory process includes the tools necessary to safeguard U.S. interests, Hollings disagreed. Allowing companies backed by governments who can "print money" in the deregulated U.S. telecom market will skew competition, Hollings said, citing DT's willingness to pay more than $21,000 per subscriber for its VoiceStream bid.

"We're pushing to privatize, not govern-mentize," he said.

Hollings also expressed concern about the manner in which the law regarding foreign government ownership effectively was altered without congressional approval. The WTO agreement was never ratified by the legislative branch as a treaty, thus its stipulations lack the weight of domestic law, he said.

The WTO agreement does not include any foreign government ownership restrictions, Hollings said. "And with that little nuance, they say the law's been changed.... Isn't that wonderful? I'd like to be able to change laws like that."

But without the understanding that government-controlled telcos such as DT could enter the U.S. market, many observers doubt that so many countries would have signed the WTO agreement - a document that the U.S. government pushed, in part, to open foreign markets to U.S. telecom interests. European officials already threatened retaliation if the DT/VoiceStream deal is blocked, which could have dire WTO consequences, said Richard Fisher, assistant U.S. trade representative.

"A perception that the U.S. is turning its back on our current operating procedure risks halting or reversing the momentum toward liberalization," Fisher said."In short, a shift to restricting our market now would threaten the hard-fought liberalization and growth that we have experienced in telecom markets around the world and diminish our leader-ship. Why would we want to take that risk?"

The conflict between the White House - responsible for directing the WTO effort - and some members of Capitol Hill on this issue is intriguing, said Rudy Baca, global analyst for The Precursor Group.

"This is a fight with the administration," Baca said."The interesting thing is you've got Fritz Hollings, a usually loyal Democrat, leading the fight with a Democratic administration."

Most observers believe Hollings' bill to abolish the FCC's ability to waive the foreign government-ownership cap will not have enough support to become law. A greater threat to the DT/Voice-Stream deal is an amendment Hollings made to the appropriations bill that would prohibit the FCC from spending funds to review a deal involving a company that is more than 25% owned by a foreign government.

"That's Washington at its best - if you can't get it passed in a bill by itself, put it on something everyone wants to pass," said Gene Michael-son, a partner in Arthur Andersen's technology, media and communications consulting practice, which has VoiceStream as a client.

DT received better news about the merger away from the hearing, as the Department of Justice tacitly ruled there were no antitrust concerns with the deal. While significant, the DOJ approval was expected - DT has no U.S. wireless holdings, and VoiceStream is not even a top five carrier in terms of U.S. subscribers.

Perhaps more important to DT's ultimate goal was the German government's decision to lower interconnection rates in the country, which should further open the German telecom market to competition. Many industry observers cited similar action by Japan's government this summer regarding NTT's inter-connection rates as a key to NTT Communications being allowed to buy Verio, a Colorado-based Web hosting company.

Combined with U.S. concerns about the WTO, such actions should pave the way for the DT/VoiceStream deal to be approved by regulators, Baca said. However, the process will not be quick, he added.