Can World Com Sprint To The Finish?

Without concessions, Justice will file suit against the merger

WorldCom Vice-Chairman John W. Sidgmore thought he was joking. "Thank God for Microsoft," he mused during a recent industry conference. "If it weren't for [Bill] Gates, we'd be the most hated company at the Justice Dept." Sidgmore's quip left his audience in stitches, but no one's laughing back at WorldCom's Jackson (Miss.) headquarters. Regulators in both Washington and Europe are threatening to veto the telecommunications giant's proposed $120 billion bid for Sprint Corp. The merger "is a dead man walking," says Legg Mason analyst Scott C. Cleland.

WorldCom and Sprint officials insist they can still salvage a deal, but the companies must scramble: Sources say that without last-minute concessions by WorldCom, Justice's antitrust chief, Joel I. Klein, is poised to file suit against the merger by the end of the month. That may mean making more divestitures than WorldCom CEO Bernard J. Ebbers could swallow. Meanwhile, the EU is poised to reject the deal under any terms, for fear that the merged entity--which would handle 45% of global Internet traffic--would forever establish U.S. hegemony over the Net.

What will it take to get the deal back on track? Justice is asking WorldCom to divest Sprint's Internet backbone business, which provides high-capacity data routes to service providers. WorldCom--already the biggest carrier of Internet traffic, thanks to its UUNet division--is willing to comply. And WorldCom would also spin off some of Sprint's residential long-distance unit, to alleviate fears it would dominate the market.

But sources say the final sticking point with Justice is Ebbers' unwillingness so far to part with a significant enough portion of the combined company's residential long-distance unit and the network that serves them. They would have a 26% share--raising fears of a duopoly with AT&T. To abandon the residential market, Ebbers said earlier this year, "would be foolish and shortsighted." But in the end, he is likely to offer to divest most of Sprint's long-distance business as well. Why? He badly needs Sprint's wireless operations. And if WorldCom can't pull off the deal, its own independence may be lost.

PAYBACK TIME? Among the potential buyers are plenty of European telecommunications giants--including Deutsche Telekom and France Telecom--eager to exploit WorldCom's vulnerability as their chance to enter the U.S.

But even if WorldCom can wrangle an eleventh-hour deal out of Washington, it may face an even bigger challenge at the European Union. Truth is, the European backlash may simply be payback for Ebbers' handling of his acquisition of MCI in 1998. European officials feel that Ebbers bargained in bad faith in his pledge to divest MCI's Internet business. After buying MCI's Internet unit from Ebbers, Britain's Cable & Wireless Communications PLC sued, claiming that WorldCom undermined the deal by recruiting back former employees and customers. "[That] left a bad taste in their mouth," says Kim N. Wallace, a policy analyst for Lehman Brothers Inc. in Washington.

The question is whether the EU--which consults daily with Justice officials--is serving as a stalking horse, to take some of the political heat off Klein. It's unclear what would happen if Washington accepted a merger that its European counterparts rejected. The deal wouldn't necessarily be dead, but WorldCom would be forced to reapply in Europe with deeper concessions. If that were to occur, the diplomatic repercussions could ring for years. With European telecommunications giants anxious to expand into the U.S. through acquisition, analysts fear that Washington regulators might retaliate. "The Europeans can't afford to get into a shouting match with the U.S.," says Wallace. After two decades of dealmaking, Ebbers' career may come down to the moves he makes over the next few weeks. And it will no longer revolve around his ability to dazzle other CEOs with his charm; this time, he's got to sell regulators on his vision as well.

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