Merger Mill Grinds to Halt in Telecom

Bad Feelings

This may seem slightly odd for a sector that brought some of the largest deals to the market in the late '90s. But obviously, things have changed a bit since then.

Origins of the industry's merger shyness can be traced in part to the 2000 kibosh the Justice Department put on the proposed merger of Sprint (FON) with a company that was then known as WorldCom and now goes by MCI. The U.S. government said combining Sprint and WorldCom would put too much of the market in too few hands. Since then, fear of antitrust scrutiny -- in addition to the industry's problems with debt and basic-business erosion -- has helped keep the blockbuster deals in check.

Probably the biggest and most widely known deal discussions concern the possible hookup between local phone giant BellSouth and top long-distance player AT&T. While some observers had debated the merits of combining BellSouth's stalled local phone business with AT&T's deteriorating long-distance effort, others say the deal's threat to recombine Ma Bell with a Baby Bell is almost a nonstarter. To foster competition, AT&T was broken up into a long-distance business and seven Baby Bells in 1984. Efforts to rejoin the family have never proceeded beyond the discussion stage.

"I wouldn't be surprised if there were conversations, but a deal with AT&T and BellSouth would be exceptionally difficult from a regulatory perspective," says Klugman.

"These are untested waters," says a former Justice Department antitrust lawyer. "We really don't know how things will play out among the regulators, the Department of Justice, and any other group that looks at these deals."

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