MCI WorldCom Inc.'s $129 billion planned acquisition of Sprint Corp. ran into early trouble yesterday as a key federal regulator expressed concern about the deal's impact on competition in the long-distance telephone market.
The purchase, which was formally announced yesterday, would be the biggest corporate takeover in history, a stock buyout that would combine two of the three largest long-distance companies and create a huge rival to industry leader AT&T; Corp.
However, Federal Communications Commission Chairman William E. Kennard, who normally greets new merger deals with noncommittal calm, was unusually swift and critical in his initial reaction to the MCI WorldCom-Sprint proposal.
"Competition has produced a price war in the long-distance market. This merger appears to be a surrender. How can this be good for consumers? The parties will bear a heavy burden to show how consumers would be better off," Kennard said in a statement.
The FCC isn't the only audience that MCI WorldCom and Sprint will have to win over. The deal must also win the blessings of the Justice Department, various state and foreign regulators, and the two companies' shareholders.
MCI WorldCom and Sprint said they believe that they can garner the necessary approvals and close the deal by the second half of next year. However, Jeanne Schaaf, an analyst with Forrester Research Inc. in Cambridge, Mass., gave the acquisition "a 50-50 chance" of surviving the regulatory process.
"We're really talking about a duopoly on long-distance in the U.S., and that ought to give legislators and regulators pause," Schaaf said. "We've been moving toward competition in long-distance markets in this country since the '60s. Now we're back to two huge providers with everyone else a distant third."
The purchase of Westwood, Kan.-based Sprint, the No. 3 long-distance company, would mark another huge step forward for Bernard J. Ebbers, the wily executive who has transformed an obscure Mississippi telephone company, WorldCom, into one of the most prominent corporations in the world.
After completing a series of relatively small but strategically canny acquisitions, WorldCom leapt onto the world stage in late 1997 by proclaiming that it was buying MCI Communications Corp., the second-largest long-distance carrier, for $42 billion. At the time, it was the largest merger ever.
When the purchase was completed last year, WorldCom put MCI's better-known name in front of its own. With the acquisition of Sprint, such modesty goes out the window: The combined company would be known simply as WorldCom.
"This merger creates the pre-eminent global communications company for the 21st century, a dramatically more effective competitor," said Ebbers, who will be president and chief executive officer of the new company.
The merger has been criticized by consumer advocates, who say it will harm competition.
"The fewer companies you get, the less chance you have for real competition," said Mark Cooper of the Washington-based Consumer Federation of America. "When you don't have vigorous competition, quality deteriorates and your prices don't go down."
Cooper said the MCI WorldCom-Sprint combination was the direct result of the approval of numerous other large telecommunications mergers in the past.
"After passing merger after merger, we're just getting bigger mergers," Cooper said. "Once you start down this path, it's very difficult to say no."
Philip Wohl of Standard & Poor's in New York said he believes that the deal is likely to be approved, perhaps after the companies sell some overlapping Internet assets. However, Wohl said the concerns about dwindling competition are overblown, especially in an industry that was a one-company show before AT&T; was broken up in 1984.
"You can't say it's bad for competition," Wohl said. "You'll have a handful of companies that have everything from soup to nuts."
Wohl added that while MCI WorldCom and Sprint might be best known for their long-distance services, the marriage of the two is really about building a bigger presence in other, more dynamic sectors of the communications industry, such as data, wireless and international markets.
Such accumulations of companies and resources have become common since the Telecommunications Act of 1996 allowed local telephone, long-distance and cable television companies to compete in each other's markets. While the MCI WorldCom-Sprint deal would be the biggest yet, it is widely assumed that more large takeovers are in the offing.
"We don't think you get innovation and vision in the market from humongous mergers, but that runs counter to the thinking of a lot of big carriers," said Forrester Research's Schaaf. "They're all hooked on this vision of a world of mega-carriers, and they want to be one of them. That's the track we're on. Here we go."
MCI WorldCom's stock fell $3.6875 to close at $67.9375, while Sprint dipped $2 to end at $58.875.
Pub Date: 10/06/99