By Mary Mosquera,
The WorldCom-Sprint merger is the first major deal regulators have blocked in the four-year telecom consolidation wave, but don't expect its failure to deter other mega-mergers, regulators and analysts said Tuesday.
The urge to merge is insatiable as it spreads beyond U.S. borders, where European companies are looking to expand across the Atlantic. WorldCom (stock: WCOM) and Sprint (stock: FON) will woo other companies or be wooed pretty quickly themselves, analysts said.
The U.S. Justice Department on Tuesday filed suit in federal court to block the WorldCom-Sprint merger because it said the combined company would limit competition and result in high prices in domestic and international long-distance, Internet-backbone, and data-network markets.
The two companies withdrew their merger from any further European review Tuesday in light of the U.S. action and the likely rejection by European regulators.
"I would be the first to say that I think as we move forward as we see increased convergence, you're going to see increased restructuring in this industry. That wouldn't surprise me," said Assistant Attorney General for Antitrust Joel Klein.
The top tier of long-distance and Internet-backbone markets would not benefit from further consolidation. But other deals by these two parties and others might benefit the companies and customers, Klein told reporters.
Fellow regulator Federal Communications Commission Chairman William Kennard welcomed the Justice Department's action.
"American consumers are better served if these companies continue to compete rather than combine," said Kennard, who also was reviewing the merger.
"Sprint will likely find another merger partner before long. They are too attractive to remain single for long," said Jeffrey Kagen, an Atlanta-based telecom analyst.
"Sprint is going to be picked up by Deutsche Telekom (stock: DT) or BellSouth (stock: BLS). Its PSC property is extremely desirable," said Scott Cleland, telecom analyst with the Precursor Group, an independent research firm in Washington, D.C.
WorldCom will have to change its acquisition strategy from a roll-up in long-distance and Internet to a vertical strategy, acquiring adjacent markets, such as wireless, he said.
WorldCom, a successful voice- and data-networking company built through 60 acquisitions over its lifetime, will limit its growth without a wireless component, Kagen said. Sprint was its best bet for a nationwide wireless system. Now it must knit together other wireless companies to get the same effect, he said.
Over the long-term, several global telecom super-carriers will emerge that can be measured in the hundreds of billions of dollars.
"Even though today's mergers are pushing us out of our comfort zone, we'd better get used to it, because in that new world, even the largest of today's companies only look like jumbo shrimp," Kagen said.
Regulators have a very difficult job balancing competing goals. They must encourage U.S. companies to continue to grow in size and scope through consolidation in order to compete against other global super-carriers. But they also have to protect competition and choice, Kagen said.
WorldCom and Sprint knew they were pushing the envelope and hoped that the Justice Department would bend its guidelines, Cleland said.
"Justice basically said the guidelines apply to the new economy as they do in the old economy," he said. "Antitrust is antitrust."
WorldCom ended the trading day Tuesday up 2 3/16 to 39 11/16. Sprint closed down 1 3/16 to 58 3/8.
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