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WorldCom Inc.’s bid for Sprint Corp. failed because the companies were unable to convince antitrust regulators to share their vision of the future of the telecommunications industry. “They just misunderstood us here,” said Kevin Sullivan, a partner in the Washington office of the King & Spalding law firm, which represented Sprint. “That was surprising.” The companies spent months explaining to the Department of Justice that the telecommunications market is rapidly evolving, he said. To be competitive, a company must offer a full range of services, including local, long distance and wireless. Only two entities are prepared for this new reality, Sullivan said. AT&T Corp. has bulked up on cable assets so it can offer local service, he said. And the Baby Bells have the infrastructure in place and merely need regulatory approval to enter long distance. “WorldCom and Sprint wanted to use Sprint’s local capacity and wireless business to develop a local residential play,” Sullivan said. “The way the market is going, you need to have a local service to be a full service provider.” Joel Klein, the assistant attorney general for antitrust at the Justice Department, said in a press briefing June 26 that the vision of the future presented by WorldCom and Sprint was too speculative. He said the government first wants to see the Baby Bells offer long distance in all 50 states and AT&T enter local markets. “When that occurs, then it would be time to consider this merger,” he said. Sullivan criticized this as short-sighted. “They were afraid to look forward in this deal,” he said. “If the goal is a competitive local environment, do you really want only two local players?” The companies are expected to decide as early as today whether to litigate. Sullivan said WorldCom and Sprint, if they decide to fight, would want a trial to start in October, while the Justice Department has said it would not be ready until January 2001. Sullivan said such stalling tactics are frustrating because they only can occur in telecommunication mergers, where DOJ does not need to seek a preliminary injunction to stop the deal. This is because the companies still need the FCC’s blessing. “We can’t force a quick trial,” he said. Antitrust experts said WorldCom had little ammunition to use in its case because by many standards the deal was anticompetitive and violated the horizontal merger guidelines. The Herfindahl-Hirschman Index of market concentration was well above the 1,800 threshold. The deal would cause the market to go from three to two players and the troubles extended across at least seven different product markets. “I never thought there was any way this deal was going through,” said Steve Newborn, a partner at Rogers & Wells in Washington. Clinton, Miss.,-based WorldCom was left with a single defense: new entry. Such an argument is permitted under the merger guidelines, but it rarely is relied upon so heavily as it was in this case. Besides arguing about the industry’s rapid evolution, the companies asserted that by 2001 WorldCom and Sprint combined will have only 6% of the total bandwidth. Ten companies each now have at least 10,000 miles of fiber-optic cable laid across the country, they said. New entrants control 20% of retail long-distance, up from 6% in 1995. Yet fitting this evidence into the legal framework proved difficult. Jonathan Baker, a professor at American University’s Washington College of Law, said the antitrust agencies evaluate if new entry would occur within two years, be profitable for the new firms and solve the competitive problems. To prevail, the companies must prove the new entry will meet all three standards. That can be an impossible task, said Phil Proger, a partner in the Washington office of Jones, Day, Reavis & Pogue. “It is not enough to show that barriers are low and entry could occur,” he said. “The parties need to show that it would occur or the companies on the fringe would expand.” Proving companies will enter and become viable competitors is tough because the companies have no incentive to unveil their business strategies to the merging parties, Proger said. “It is very difficult burden for the parties.” Marc Schildkraut, a partner at Howrey Simon Arnold & White in Washington, D.C., said DOJ wants hard evidence of entry. For instance in the pharmaceutical market, companies could show that competitors have comparable drugs in the product development pipelines. “In other markets there is just no evidence,” he said. “You have to wait for entry to happen first.” Complicating this analysis was the Justice Department’s role under the 1996 telecommunications act. DOJ must advise the Federal Communications Commission as to whether a Baby Bell has sufficiently opened the market for local phone competition to qualify to sell long-distance service. “If they permitted the deal to go through based on a prediction that they would later approve the regional bells entering the long-distance market, then that could reduce their flexibility with the Baby Bells,” said one lawyer, who asked not to be identified because of ties to the companies. Bringing in a second company from the start to buy the parts of Sprint that WorldCom did not want might have been one way to overcome the DOJ’s objections, said Robert McTammaney, a New York partner at Carter, Ledyard & Milburn. Such an arrangement would have ensured that competition would remain in some of the markets where it was obvious WorldCom and Sprint needed to divest assets, he said. Sprint spokesman Jim Fisher criticized the second-guessing. “Everybody who watches a football game likes to sit in a chair and call the plays, but there only can be a few people in the game,” he said. A WorldCom spokesman declined to comment. Newborn said he finds it difficult to fault the lawyers, whom must have briefed their clients on the risks involved. “You’ve got to have confidence in your opinion and make sure the right people involved understand the risks,” he said. “As long as they do, that is fine.” Proceeding despite the antitrust risk was not completely irrational, he noted. “Things could have happened,” he said. “There could have been political pressure to let it proceed or the government could have been distracted with another deal.” Copyright �2000 TDD, LLC. All rights reserved.

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