Federal regulators are unlikely to approve the $129 billion merger proposed by MCI WorldCom Inc. and Sprint Corp., the nation's second- and third-largest long-distance telephone carriers, viewing the arrangement as a severe blow to competition, knowledgeable sources said yesterday.
The companies are expected to formally file their merger application with the Federal Communications Commission on Tuesday, and federal officials say they will assess any proposal with an open mind. But the sources said the fusion, as announced, would violate antitrust standards used by regulators to assess the effects on competition, concentrating control of the long-distance market in too few hands.
Together, AT&T Corp., the nation's largest long-distance carrier, and the resulting WorldCom Inc. would control nearly 80 percent of the long-distance market, a level that far surpasses the federal standards. In order to gain the blessing of the Justice Department, which must approve the merger along with the FCC, the companies would have to persuade regulators that special circumstances merit disregarding the rule.
In an interview last night, Philip Verveer, a former Justice Department antitrust attorney who now represents Sprint, expressed confidence that federal regulators would eventually come to see the merger as a boon to competition. "The first reaction shouldn't be the final one," he said.
Ever since they announced plans last month for what would be the largest merger in corporate history, MCI WorldCom and Sprint executives have labored to portray the deal as being in the public interest, and as doing no harm to long-distance competition.
The basic argument: The long-distance market essentially doesn't exist anymore. The new competition is over "bundles" of services, as companies seek to become one-stop shopping centers, selling local, long-distance and high-speed Internet access in a single package. So, the companies assert, regulators should focus on the broader telecommunications market--not just long distance--when judging the power of the new company.
In that context, the companies argue, a fused MCI WorldCom and Sprint would be far from a dominant, market-controlling player. Instead, it would advance competition by being able to take on the "supercarriers"--AT&T, with its plans to sell an array of services over cable TV lines, and big local phone companies Bell Atlantic Inc. and SBC Telecommunications Inc.
"MCI WorldCom and Sprint decided to join forces as the single best hope for a strong and effective alternative to the mega-Bells and the emerging AT&T cable monopoly," MCI WorldCom chief executive Bernard J. Ebbers told the Senate Judiciary Committee Nov. 4.
At a gathering of state utility regulators in San Antonio this past week, Ebbers said, "There is no longer such a thing as long-distance." Ebbers said the combined company would expand Sprint's local telephone holdings, furthering his assertion that the merger will deliver more competition. In a pitch to rural-state regulators, he noted that both MCI WorldCom and Sprint have plans to roll out a technology designed to deliver high-speed Internet access to remote areas.
A commissioner from South Dakota asked when the company would deploy that technology. "We will put it out as soon as you get our merger approved," Ebbers said.
Some speculation surrounding the merger's regulatory prospects has focused on the fact that MCI and Sprint both own considerable Internet "backbones"--networks that carry huge volumes of computer data. According to a source with knowledge of the planned merger filing, the companies will express willingness to sell off some of their backbones to ease regulatory approval.
But sources say that won't be enough. They say key regulators are disinclined to accept the basic argument that the long-distance market has disappeared, noting that companies advertise and market the service and that people still pay phone bills marked "long-distance."
The day the merger plan was announced, FCC Chairman William E. Kennard said it appeared to represent "a surrender" in the long-distance wars. Kennard has refrained from making public comments since, but sources say senior FCC officials remain highly skeptical of the arguments advanced with the merger.
On Capitol Hill, the two companies also ran into hard questions. Even before Ebbers and Sprint chief executive William T. Esrey testified, several senators issued statements questioning their deal. "Basic antitrust principles teach us all to be highly suspicious of a merger which reduces rivals in an industry from three to two," said Sen. Herbert H. Kohl (D-Wis.),
A judiciary committee staffer said yesterday that the majority of the panel left the hearing no more inclined to support the merger.
The Justice Department does not comment on pending cases. But in a speech before state regulators in San Antonio this week, Joel I. Klein, the Justice Department's antitrust chief, added to some perceptions that MCI and Sprint face difficult prospects.
Asked generically how the antitrust division approaches mergers that deliver competitive benefits in one area, but anti-competitive effects in another, Klein said: "Our first concern is to make sure there are not anti-competitive effects on the market."
MCI and Sprint have argued that local Bell companies will soon enter the long-distance business, thus injecting more competition. But in response to a question, Klein appeared to reject that argument, noting that Bell Atlantic's plans to sell long-distance plans in New York took more than two years of work as the company took steps to open its local market to competition. He said other entrants would need to navigate a similar process.
"I don't think once you open the gate, everyone comes pouring through," Klein said.