Imported Risks

To buy a stake in an American carrier, international players have challenges to surmount.

Vodafone owns almost half of Verizon Wireless. NTT DoCoMo recently moved to buy a stake in AT&T Wireless. Carriers such as BT Wireless, NTT DoCoMo, Telefonica and Vodafone are global powerhouses. And then there is the soap opera of foreign ownership dramas, the acquisition of VoiceStream by Deutsche Telekom (DT). Everywhere in the wireless industry, there is evidence that carriers are immigrating. With three of the world's top four carriers in, or looking to get in the U.S. market, American wireless is clearly prime property. Our borders, however, are not always wide open.

No Quarter According to section 310 of the 1934 Telecommunications Act, no foreign entity can directly invest more than 20% in a U.S. carrier or indirectly (through a holding company) invest more than 25% without FCC approval. Furthermore, the statute says companies that are more than 25% owned by a foreign government cannot control a U.S. telecommunications license.

The FCC can overrule this, however, if the commission concludes that entry by the foreign company is in the public interest. With the United States' membership in the World Trade Organization (WTO), the FCC presumes that entry by foreign companies from WTO countries is in the public interest.

When reviewing a foreign-ownership application, the FCC International Bureau, the division that handles foreign-ownership applications, looks for concerns in several areas including national security, law enforcement and fair competition.

Once the proposed merger or acquisition is finalized between the foreign and domestic companies, an application is filed with the FCC. If agencies such as the FBI or Department of Defense have concerns about the trans- action's implications on national security, the companies must negotiate an agreement with the particular agency. Such agreements would then become mandatory conditions to the FCC's approval.

Should the FBI, the FCC or any other party prove that entry by the foreign investor would be detrimental to domestic competition, law enforcement or national security, and a compromise cannot be reached, the application would be denied.

Not Welcome When DT's American shopping spree ended with the selection of VoiceStream, the $50 billion deal (now down to about $30 billion) raised many red flags. The most heated area of concern might be the German government's 58% stake in DT. Although DT has pledged to sell the German government's shares to help gain approval of the VoiceStream acquisition, all is quiet on the German front. DT has not given any indication as to when it will cut its ties to the German government. Given current market conditions for wireless stocks, some doubt that DT will ever sell the government's half of the carrier. Last October, a German government official told The Wall Street Journal that with DT shares dropping, "there's no way we're going to sell."

"I think the only thing standing in their way at the moment is the general depression of all of our telecommunications stocks," said Brian O'Connor, VoiceStream vice president of legislative and regulatory affairs. "The German government has a tremendous incentive with some of their financial obligations to sell the stock when it makes business sense."

If wireless stocks continue their downward spiral, it may not be regulators that nix the VoiceStream deal. The two carriers agreed that if DT shares drop below 33 Euros on seven random days of the two weeks leading up to the deal's closing, VoiceStream could renegotiate or forgo the acquisition. DT shares have undulated around that mark in recent months. If it abandons the deal, VoiceStream would walk away with the $5 billion it received from DT, while the German carrier would end up with a mere 10% stake in VoiceStream.

Ultimately, O'Connor thinks American regulators shouldn't find the German government's ownership in DT unusual.

"It's an accident of history that in the United States, telecommunications companies were not owned by the government," he said. "Elsewhere in the world, the telephone companies were owned by the government, so it's really not a fair question."

O'Connor called the acquisition a significant investment in the United States, and added that it has no national security or law-enforcement conflicts. The deal is certainly key to VoiceStream's future.

"It's really turned out to be a wonderful development for us," O'Connor said. "We will be able to expand our business and become a viable competitor to the other national wireless companies."

Several organizations have come to bat for the merger, notably the Organization for International Investment (OFII) and the Communications Workers of America (CWA). In its filing with the FCC, OFII emphasized the United States' commitment to the WTO. At stake with the DT/VoiceStream decision is the United States' credibility and its ability to negotiate future agreements.

"Failure to maintain a hospitable climate for foreign investment in the U.S. telecom market will harm U.S. consumers and undermine U.S. leadership in trade liberalization," the OFII filing reads.

CWA supports the merger and believes that should the FCC deny the merger, the impact on the United States would be extremely detrimental.

"Any commission decision to deny this transaction solely on the basis of DT's greater-than 25% foreign ownership could pose serious public interest harm by undermining U.S. trade agreements and thereby encouraging retaliation by foreign governments against U.S. telecommunications firms," their FCC filing reads.

Novaxees, a U.S. owned broadband provider in Europe, has firsthand experience with foreign ownership hurdles. While voicing concerns about the challenge of competing against "former European monopolists, such as DT," the company favors the merger, but with conditions.

Novaxees' filing suggests requirements to approve the merger. DT must make binding commitments to cease its anti-competitive strategies, and the German government should sell its stake in DT within a reasonable time frame.

Sen. Hollings' Opus The most outspoken critic of DT's acquisition of VoiceStream has been Sen. Ernest Hollings (D-SC). Hollings stands firm by the 1934 statute that does not allow companies that are more than a quarter owned by foreign governments to purchase U.S. telecommunications assets.

The senator also has raised national security and anti-competitive concerns.

"We didn't deregulate U.S. telecommunications to then invite the German government to play in this market," said Andy Davis, Hollings' communications director.

Hollings' first salvo was the Foreign Government Investment Act of 2000. The bill seeks to eliminate the FCC's ability to waive the statutes against foreign-government control over U.S. telecommunications carriers if the merger is in the public interest. In Hollings' estimation, foreign-government-controlled entities never serve the public interest by competing with domestic companies.

"The advantages that a foreign-government-owned company has are tremendous access to capital and favorable interest rates," said Davis. "These are companies that can print money; they are owned by countries that have unlimited resources in a lot of respects."

Introduced last June, the bill is currently under review by the Committee on Commerce, Science & Transportation.

Even before DT made its final selection of an American carrier, Hollings' attention was on the foreign-government-ownership matter.

"One of the things that really sparked his attention to the subject was a Washington Post article that had DT Chairman Ron Sommer saying that no company was out of his reach, that he had a $100-billion kitty," Davis said.

As far as America's commitment to the WTO, Hollings believes the law of the land must come first. He also points out that the United States would not be the first WTO country to deny DT. Both Italy and Hong Kong thwarted DT from acquiring domestic carriers there because of the German government's stake in DT, according to Hollings.

Hollings' latest move was an attempt to bar VoiceStream from the recent C- and F-block auctions. He believes that the initial $5-billion cash investment in VoiceStream has made the carrier a puppet of DT. Furthermore, Hollings said the investment gives DT an ownership interest greater than allowed by regulations. FCC Chairman William Kennard did allow VoiceStream to bid in the auction. In a letter to Hollings, however, Kennard did note that "such action does not prejudice the commission's ability to examine foreign ownership issues at the conclusion of the auction as part of our licensing review process."

VoiceStream hasn't detected any significant support for Hollings' position and expects approval of the acquisition by April. The Hollings camp, however, is dug in for the long haul and points to bipartisan support for the Foreign Government Investment Act and the 30 senators who co-signed Hollings' initial letter to Kennard. The letter urged him to scrutinize any merger between a U.S. carrier and a foreign-government-owned company.

"Sen. Hollings thinks the law is clear about this, and he'll continue to seek to strengthen that," Davis said.

When NTT DoCoMo made its near $10-billion investment in AT&T Wireless, it may have wisely chosen to buy a less-than-20% stake in the carrier. The deal calls for DoCoMo to acquire 16% of AT&T Wireless, thereby avoiding FCC scrutiny of the transaction.

According to DoCoMo's 2000 annual report, the carrier's foreign expansion policy is "to acquire only an equity stake sufficient to have a say in the partner's operations, including management decisions and technology transfers." Whether DoCoMo will clear the foreign-government-ownership hurdle or not, remains to be seen.

In a statement for the Foreign Government Investment Act of 2000, Sen. Ernest Hollings (D-SC), mentioned NTT DoCoMo as a carrier with significant government ownership. Ken Woo, AT&T Wireless spokesperson, said that the Japanese government's stake in DoCoMo is less than 5%. A DoCoMo spokesperson, however, said the Japanese government does not own any portion of the carrier. Both AT&T Wireless and NTT DoCoMo declined further comment.