What if WorldCom-Sprint Merger Fails?
By Peter S. Goodman
Washington Post Staff Writer
Friday, May 19, 2000; Page E01
From the day it was announced, the planned merger of WorldCom Inc. and Sprint Corp. has been viewed in two starkly different ways.
A mostly New York-based crowd of stock analysts and investment bankers has cheered the combination as a forgone conclusion that promises growing profit. But many policymakers and lawyers in Washington have been skeptical of its chances of clearing regulatory hurdles.
Yesterday, as knowledgeable sources confirmed that a Justice Department antitrust team has recommended against the deal, the faith of some analysts was eroded. Most said they continue to believe it will eventually be approved but admitted significant doubts for the first time.
Many analysts dismissed the negative vibrations from Washington as a Justice Department tactic to extract concessions from the companies. Others expressed certainty that federal officials will not block the deal, given their assent to blockbuster fusions such as SBC Communications Inc.'s takeover of Ameritech Corp., which placed roughly a third of the nation's local telephone lines in the hands of a single company.
But against that backdrop of optimism, Wall Street began discussing what the futures of WorldCom and Sprint would look like should the deal unravel. In a telecommunications universe that has come to see consolidation and unprecedented scale as an inevitable and positive force for shareholders and consumers alike, suggestions that the $129 billion marriage has hit a bump has provoked exploration of possible new strategies.
"Conservatively, you've got to do that," said Brian Adamik, chief operating officer at the Yankee Group in Boston, a prominent market research firm, who continues to believe the companies will get their deal done. "You've got to look at what the landscape would look like if this deal doesn't happen."
The market captured a glimpse and did not like what it saw, knocking down WorldCom's stock by nearly 6 percent, or $2.43 3/4 It closed at $39.56 1/4, less than $2 above its 52-week low. Sprint declined 3 percent, or $1.75, to close at $56.25.
For WorldCom, the failure to close a deal would deliver a particularly uncomfortable blow. Chief executive Bernard J. Ebbers has proven the master of the deal, using highflying stock as currency to swallow more than 60 companies.
A failed deal "represents a wall for them," said Scott Cleland, a Washington-based analyst with Legg Mason Precursor Group, whose previous forecasts of Justice Department opposition have brought derision from Wall Street. "Their growth strategy--which has been phenomenally successful over the last decade--has been acquiring long-distance and Internet backbone companies. It appears we're at the end of this road."
Cleland suggested a failed Sprint deal could transform WorldCom "from hunter to hunted," as a European national carrier such as Deutsche Telekom AG or British Telecommunications PLC comes across the Atlantic. The German national carrier recently made an abortive effort to capture Qwest Communications Inc., the nation's fourth-largest long-distance carrier and a growing conduit for Internet traffic.
Were the Sprint deal to come apart, most industry observers say WorldCom would be compelled to secure a national wireless venture. WorldCom's last major corporate capture, MCI, has amassed enormous value as a long-distance brand and the company is a leader in shipping Internet traffic to points around the globe, but wireless is a conspicuous gap--one that would be filled by Sprint PCS.
A senior executive at a major telecommunications company said WorldCom would be likely to pursue Nextel Communications Inc., the Reston-based wireless carrier, or perhaps seek to acquire VoiceStream Wireless Corp. Alternatively, WorldCom could seek to erect its own wireless network by acquiring "spectrum"--the right to transmit through the airwaves--in a series of federal auctions. But that route is fraught with uncertainty and enormous costs, the executive said, making that scenario unlikely.
WorldCom last year seriously considered a purchase of Nextel but backed away after concluding the company carried too much debt. Since then, Nextel has more than doubled in value.
"They turned down Nextel for $45 to $50," said Paul Wright, an analyst with Loomis Sayles in Boston, who thinks the Sprint deal will still close. "Now they'd have to pay $125-plus for Nextel not even a year after. That would be awkward." He speculated WorldCom might instead seek to buy a major local telephone company with significant wireless holdings, perhaps regional giant BellSouth Corp.
BellSouth is also mentioned as a likely suitor for Sprint, if the WorldCom deal failed, along with Deutsche Telekom. Both BellSouth and the German carrier made plays for Sprint before WorldCom swept the company away.
But most analysts still say it wouldn't come to that. In a bulletin, Daniel P. Reingold, who heads the telecommunications research arm of Credit Suisse First Boston, reported that Justice staff members have advised against the deal. But he noted that antitrust chief Joel I. Klein--who must ultimately decide whether to level a challenge--is not bound by that recommendation. He placed the likelihood of eventual approval at 60 percent, down from 75 percent to 80 percent.
As Washington antitrust experts digested the news, some saw the clouds over the WorldCom-Sprint deal as evidence that bountiful projections about the future may now be succumbing to the tempered realities of the present. The two companies have argued that the combination of the second- and third-largest long-distance carriers poses no harm to competition because long-distance essentially no longer exists by itself: Carriers are seeking to sell the full spectrum of services--local, long-distance, wireless and Internet connections.
While that may describe the horizons, tonight WorldCom and Sprint will still blanket the airwaves with ads seeking to capture long-distance business. The market the companies portray as an anachronism is still valued by analysts at about $60 billion a year.
The companies argue that any erosion to competition would be offset by new entrants such as local Bell companies expanding into long-distance and companies erecting fiber-optic networks. But the Justice Department, sources say, sees a long-distance market still dominated by three big players--AT&T Corp, WorldCom and Sprint. Only one Bell company, Bell Atlantic Corp., has gained federal permission to enter the long-distance business and only in a single state, New York. The companies burying fiber have thus far captured few long-distance customers.
¸ 2000 The Washington Post Company |
