Foreign Friends or Foes?

Foreign companies seeking to invest in U.S. service providers' businesses is a growing trend, one that U.S. Congress members are wary of supporting.

Over the past few years, numerous international telecommunications providers have come to the United States in search of enticing mergers and acquisitions. One of the most well-publicized events, the proposed acquistion of VoiceStream by Deutsche Telekom (DT), has focused attention on whether the rules by which the providers play should be altered. Currently, foreign investment can trigger reviews by multiple federal agencies as well as Congress.

In the first week of September, DT cleared its first regulatory hurdle, winning the Justice Department's approval of DT's acquisition of VoiceStream. DT had proposed the acquisition of both VoiceStream and Powertel, which would provide the company with almost nationwide GSM coverage. A number of lawmakers, however, have expressed concern over the proposed DT-VoiceStream merger as DT is 58% owned by the German government, which would retain a significant 40% ownership interest after the acquisition of VoiceStream.

Changing the Rules The DT-VoiceStream merger represents a larger trend of foreign companies seeking to invest in U.S. telecommunications companies and quickly gain a foothold in the U.S. market. Although supportive of the globalization of the marketplace, members of Congress have expressed concerns about the dangers of subjecting U.S. communications facilities to the control of another government. In June, Sen. Ernest "Fritz" Hollings (D-SC) introduced the Foreign Government Investment Act of 2000, which would prohibit the transfer of licenses, permits or other operating authority to "a corporation, joint venture, partnership, other business organization, or trust directly or indirectly controlled by a foreign government or its representatives," with control being defined as a greater than 25% ownership interest by a foreign government. Following Hollings' lead, in the middle of September, Rep. John Dingell (D-MI) introduced companion legislation in the House of Representatives.

Despite visible support in the Senate, the chances of the bill being the voted out of the Senate Committee on Commerce, Science, and Transportation, and sent to the entire Senate body for consideration appeared to be too big a task given the opposition to the bill by the committee chairman, Sen. John McCain (R-AZ). Nevertheless, Hollings was able to attach a pared-down version of the bill to the Commerce State Justice Appropriations bill, which the Senate likely will take up before the end of the legislative session. If enacted, this provision would be effective for one year, and thus would serve as a 1-year moratorium on transactions involving foreign-government-controlled wireless companies.

Tough Rules Are Relaxed The policy of restricting foreign-government ownership of U.S. telecommunications companies is not a new one. In the Communications Act of 1934, Congress enacted laws that prohibited foreign governments and companies with as little as one foreign director or officer from being FCC licensees. In 1996, these restrictions were relaxed so that companies that were more than 25% owned by a foreign government could hold FCC licenses provided that the FCC determined that it would be in the public interest. Subsequently, in 1997, under the auspices of the World Trade Organization (WTO), the United States, along with 68 other countries, became parties to the Basic Telecommunications Services Agreement. The agreement was designed to ease entry for new competitors into the United States and to provide new opportunities for the U.S. providers overseas. Specifically, through the agreement, countries committed to market opening and privatization efforts. According to William Kennard, FCC chairman, the effect of this agreement was to create a "rebuttable presumption" that a transaction involving countries that are parties to the WTO agreement would receive approval by U.S. regulators. Thus, in the eyes of free-trade advocates, the Hollings bill appears as a step backwards from the market-opening initiatives of the administration.

In defense of the proposed legislation, both Hollings and Dingell have indicated that they support the concept of foreign investment as a pro-competitive measure. Both members draw a clear distinction between foreign investment and foreign-government investment, decrying the latter as anti-competitive because such an investment would permit foreign government to artificially boost companies through subsidies or other government funding. In justifying the need for his bill, Hollings stated that the bill was required to "clear up any appearance of ambiguity" regarding how transactions involving foreign-government-controlled wireless companies should be evaluated. Moreover, Hollings argues that this legislation would stimulate countries wishing to enter the U.S. market to redouble their privatization efforts.

Although Hollings has garnered support among 30 senators and a number of congressmen, the passage of legislation is far from certain. In a recent "Dear Colleague" letter, McCain and Rep. Michael Oxley (R-OH) expressed their concern that Hollings' proposal would invite retaliation from U.S. trading partners. Other members have sided with McCain and Oxley because as recently stated by Rep. Jennifer Dunn (R-WA), "the current FCC process provides more than adequate protection against any actions that would harm U.S. businesses or consumers." Several members are less critical of the bill. Rep. Anna Eshoo (D-CA) suggested the possibility of a modification to language that would focus on altering the nature of the rebuttable presumption that the FCC now gives to WTO members. Meanwhile, Rep. Cliff Stearns (R-FL) raised the possibility of changing the existing law to specify the public-interest factors that the Congress wants the FCC to consider in reviewing merger proposals.

Defending Pro-Competition As Congress grapples with this legislation, representatives from within the executive branch are openly articulating their views in hopes of influencing those members of Congress who remain undecided on the issue. Agencies, including the Department of Justice, the FBI and the FCC, believe that the U.S. government currently has enough safeguards in place and enough tools available to scrutinize transactions and protect U.S. interests from a national-security standpoint and competition standpoint. Kennard specifically reminded the Congress in a recent testimony that despite the "rebuttable presumption" created by the WTO agreement, the FCC still closely analyzes each transaction and retains the ability to reject transactions by WTO members. As for the proposed legislation, representatives from the U.S. Trade Representatives office have aired a concern that should the Hollings bill pass, it would jeopardize the new round of service negotiations that the WTO recently agreed to open.

Representatives from the private sector also have jumped on the bandwagon, voicing diverse opinions on the Hollings bill. The U.S. Chamber of Commerce has warned that the bill is "bad policy" and could chill foreign investment in telecommunications. The business community also fears that the Hollings bill could yield an even more far-reaching effect of chilling investment in telecommunications companies altogether, reasoning that U.S. companies' growth would be stunted without an ability to globalize their presence. The Information Technology Association of America believes that this bill would "hamstring the robustness of the digital economy." The Communications Workers of America, meanwhile, has expressed support for the bill provided that the foreign-controlled company is willing to establish the appropriate standards for communications products and services and labor conditions. Most recently, Ivan Seidenberg, Verizon co-CEO, opined on the issue, agreeing that the acquisition of a U.S. telecommunications company by a government-controlled entity such as DT was "troublesome," but also stating that "defensive legislation isn't the right answer." Seidenberg posits, instead, that the countries may be able to come to a satisfactory resolution without resorting to legislation that creates additional trade barriers.

Crossroads The U.S. government is at a crossroads. To date, the United States has been a proselytizer of competition and has been an effective advocate of open markets. Congress must balance competing goals and decide on a course of action. On one hand, passage of legislation like the Hollings bill may motivate foreign governments to privatize their telecommunications systems, preserve our national security interests and encourage the maintenance of a level playing field among competing telecommunications companies within the United States. On the other hand, the United States may find that if it increases its restrictions on foreign investment, it would encourage reciprocal restrictions by other countries or at the very least undercut its effectiveness as an advocate of global competition. If either of these negative outcomes results, U.S. providers could find that their opportunities in foreign markets and their ability to compete globally would rapidly diminish.

By attaching his bill to the Commerce State Justice Appropriations bill, Hollings has assured that the Senate will address the issue this legislative session. Whether Congress fully considers the merits of the bill or simply allows it to ride on the coat tails of the appropriations bill will, in large part, be determined by the lobbying efforts of the industry and other federal agencies. With the 106th Congress scheduled to conclude in October, now is clearly the time to weigh in on this issue.