FCC, Faced With Telecom Crisis,
Could Let a Bell Buy WorldCom
By YOCHI J. DREAZEN
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Declaring the telecommunications industry in a
state of "utter crisis," the chairman of the Federal Communications
Commission suggested his agency could allow a Baby Bell to take
over WorldCom Inc., a combination once seen as unthinkable.
A merger of a large
regional phone carrier and
the nation's second-largest
long-distance company
would reverse the FCC's
position on such deals. It
could also revive the spirit
of AT&T's monopoly
before the 1984
court-ordered breakup that
created the regional Baby
Bells, by allowing one
company to control huge
swaths of both markets.
But in his first public
comments on the unfolding
WorldCom scandal, FCC
Chairman Michael Powell
said the industry's battered,
debt-ridden condition now
leaves regulators little
choice but to consider such
options, especially if the
alternatives would disrupt
phone and data service to
WorldCom's 20 million
customers. To keep
WorldCom's operations
stable, he also called for
the government to continue
its billions of dollars in
federal contracts with the
company, rather than pull
back as some White House officials have suggested.
Mr. Powell cautioned that a Bell's bid for WorldCom would still be
far from certain to win regulatory approval. But one remedy for the
broader industry's ills, he said, could be major consolidations along
the lines the defense industry went through in the 1990s.
"There are plenty of doctrines in antitrust and competition policy that
would take into consideration the duress and state of the market," said
Mr. Powell, who in the Clinton administration was a top official of the
Justice Department's antitrust division. "If a Bell company brought a
deal to us, that would certainly be part of the consideration."
Just five years ago, then-FCC Chairman Reed Hundt helped sink a
potential $50 billion merger between the Baby Bell SBC
Communications Inc. and AT&T Corp. -- still the leading
long-distance carrier -- by publicly labeling such a combination
"unthinkable" because of its size.
A deal between a Bell and WorldCom also could lead to further
consolidation as the other Bells scrambled to acquire AT&T and
Sprint Corp. as a way of keeping pace. Mr. Powell, however,
suggested that Bells probably would have trouble affording such acquisitions.
Damage to the telecommunications sector, the FCC chairman said, extends far beyond ailing companies
such as WorldCom, Global Crossing Ltd. and Qwest Communications International Inc. Even relatively
stable companies such as Verizon Communications Inc. and SBC face huge challenges now that lenders
are extremely hostile to telecom companies.
"The real problem is that there was a collapse in this sector, a crisis in this sector, even before all of this
happened," he said, noting that WorldCom's share price had plunged to $1 before the accounting
scandal broke. "That's why this is so painful to the telecom market -- talk about something that was
down on its knees and didn't need to be kicked in the gut."
Mr. Powell said a big concern is that other
telecommunications companies may be hiding their own
accounting irregularities. He declined to name specific
companies, but said his agency is trying to be prepared for
the impact a bankruptcy filing by WorldCom or other
carriers would have on their customers.
In a wide-ranging interview in his office where an oversized flat-screen computer monitor sits on a
sprawling desk, Mr. Powell said the government bore some responsibility for the industry's problems,
which began with the frenzy to create new companies following the landmark 1996 Telecommunications
Act. The law allowed Bells and long-distance companies to enter each other's markets to foster
increased competition, but didn't address the prospect that they would look to acquire each other and
reduce the number of competitors.
Mr. Powell said that he thinks the FCC may have erred in the past by implicitly encouraging the
formation of hundreds of Bell competitors without realizing how few of them would ultimately be able to
survive. Many of those companies borrowed heavily to finance their quick expansion but have since
filed for bankruptcy or appear likely to do so in the near future.
"We correctly believed these markets didn't need to be natural monopolies and they could be
competitive, but I think we tended to over-exaggerate how quickly and how dramatically it could
become competitive," Mr. Powell said.
Pressure to show profits apparently led companies such as WorldCom to cook
their books when their performance failed to live up to expectations. "It
wouldn't shock me," Mr. Powell said, "if there were more companies that
couldn't resist those pressures honestly."
Mr. Powell's remarks came days after former WorldCom executives accused
of artificially inflating the company's revenues by almost $4 billion angered
lawmakers at a congressional hearing by refusing to testify. One of the
executives, former WorldCom chief financial officer Scott Sullivan, has told the
company's internal investigators that ousted chief executive officer Bernard J.
Ebbers knew of his plan to shift billions of dollars of normal expenses into
capital expenditures accounts, boosting the company's earnings, congressional
investigators said. Mr. Ebbers's attorney denies that account.
Mr. Powell said Messrs. Sullivan and Ebbers deserve to be punished for their roles. "At the end of the
day, the officers of a corporation are responsible for the credibility and value of that corporation," Mr.
Powell said. "This was classic dime-store fraud, and it may have spread deep into the company like a
cancer."
Nevertheless, he made clear the company's long-distance and data services operations need to be kept
stable, though the General Services Administration is reviewing WorldCom's government contracts and
the White House has said it might bar federal agencies from signing new deals with the company.
The government "ought to be very, very careful about adding to the circumstances that might collapse
the company," he said. "This is a significant company whose assets are critical components of the entire
network. It would be messy if they became unavailable."
WorldCom's current management, including new CEO John Sidgmore, said Thursday that a
bankruptcy filing by the company, based in Clinton, Miss., was looking increasingly likely. Protecting
WorldCom's business and residential customers is rapidly becoming a hot political issue. On Friday,
Senate Commerce Committee Chairman Ernest F. Hollings wrote Mr. Powell that his "foremost
responsibility is to protect the integrity and reliability of the nation's telecommunications network." The
South Carolina Democrat also asked Mr. Powell to detail the agency's contingency plans.
At this point, Mr. Powell said, WorldCom's officials and lenders have given assurances that the
company would continue to fully maintain its voice and data networks. "It's going to be a tricky situation
because there will need to be a major restructuring of the company or its assets that doesn't lead to
service outages," Mr. Powell said. "We're watching closely, but for now both the company and the
banks believe that keeping the networks running is in everyone's best interest."
Still, he said, "things are becoming more acute by the day."
Write to Yochi J. Dreazen at yochi.dreazen@wsj.com
Updated July 15, 2002 12:18 a.m. EDT |
