Analyst predicts DOJ will block
Sprint/MCI WorldCom merger
By David Rohde, Network World
03/15/2000 A well-known telecommunication analyst
predicts the U.S. Department of Justice will block the
proposed merger of MCI WorldCom Inc. and Sprint Corp.
Scott Cleland, lead analyst for the Legg Mason Precursor
Group, said the Justice Department is preparing to
request an injunction against the merger in federal
court. MCI WorldCom and Sprint would then have the
right to seek a trial, but Cleland noted that few mergers
delayed in this manner ever go through.
In his report, Cleland repeatedly cited what he called
the "failure" of the 1998 spin-off of the former MCI
Internet backbone to Cable & Wireless USA ? the key
move that sealed government approval of the merger
between MCI and WorldCom.
The current MCI WorldCom has broadly signaled that it
would be willing this time to spin off Sprint's Internet
business, but Cleland said the Justice Department
doesn't think that's nearly enough. In a harsh
assessment, Cleland said the Justice Department is
"embarrassed that the MCI divestiture to Cable &
Wireless went so badly," and added that the regulators
"harbor a 'fool me once, shame on you, fool me twice,
shame on me' attitude toward MCI WorldCom."
Cable & Wireless last year sued MCI WorldCom,
charging, among other things, that the MCI Internet
customer records they received were fouled up. Cable &
Wireless customers also complained that the transition
was rocky. The two companies recently settled the case,
with MCI WorldCom agreeing to pay $200 million.
MCI WorldCom didn't acknowledge any wrongdoing, but
Cleland said the settlement "strongly suggests that
that Cable & Wireless' charges of competitive damage
from anticompetitive conduct had merit."
Among other reasons that the merger is in trouble,
according to Cleland:
The Justice Department has signed on top
litigation attorneys for the case, something it has
rarely done in past telecom mergers.
The Justice Department doesn't buy into theories
that regional Bell operating companies will soon be
entering the long-distance market in many states.
The next-biggest competitor, Qwest
Communications International Inc., will soon be
shut out of long-distance service in 14 states
because of its pending merger with US West Inc.,
which is barred from long-distance carriage in its
own territory.
The combination of MCI WorldCom and Sprint
increases concentration not only in the
long-distance voice market, but also in frame relay
and ATM.
Cleland cautioned that the Justice Department's action
may not come immediately and may even take several
months. He said that if MCI WorldCom can't buy Sprint,
someone else probably will. Likely prospects include
BellSouth Corp. and Deutsche Telekom AG.
Other analysts were rushing this morning to put their
own spin on the report, in what appeared to be a largely
successful effort to avoid damage to Sprint's stock. A.
G. Edwards & Sons Inc. sent out a note disagreeing with
Cleland's analysis, but adding that even if the merger is
blocked, Sprint's value should hold up as an acquisition
target for someone else.
MCI WorldCom and Sprint representatives were not
immediately available for comment.
Sprint's stock was at $58.125 in mid-afternoon trading,
up 44 cents, while MCI WorldCom was also up 44 cents,
to $43.50.
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