Playing the Odds in Telco: Will WorldCom-Sprint Ring True?

Despite fears of a scuttling, Seymour sees the deal going through because it's not anticompetitive.
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Today begins the official open season on

WorldCom

(WCOM)

and

Sprint

(FON)

in their attempt to merge into a $115 billion telecom giant: Tuesday kicked off a long-scheduled

European Commission

hearing on the merger.

More antitrust objections lie ahead for the two companies domestically as the

Justice Department's

Joel Klein, fresh from his dubious triumphs in the

Microsoft

(MSFT) - Get Report

antitrust proceedings, turns his attention to the U.S. long-distance marketplace.

The

Federal Communication Commission's

Bill Kennard has said the FCC wants its piece of WorldCom's hide on this one, too.

I predicted on "TheStreet.com" show on

Fox News Channel

a couple of weeks ago that despite the general gloom and doom on this merger, it would go through. How, hundreds of

TSC

readers subsequently asked, could I think that, when so many others had predicted that regulatory problems would put this one on the rocks?

I should never, I concede, plead "rational behavior" as an answer for anything I believe about the market, for -- as earlier today

when I said

Goldman Sachs'

mighty analyst Rick Sherlund might be "fatally rational" in his assessment of the total share values of a split-up

Microsoft

-- I believe rational thinking and actions are rarely controlling events in regulated marketplaces. And nowhere is that more evident than in the proceedings of the European Commission, which has posted some lulus in the "Irrational Policies" record books.

But I confess that I do see, or at least hope for, a rational process in the enabling of this merger, for the simple reason that it's good for nearly everyone -- and it's

not

anticompetitive.

Throughout the regulatory approvals that lie ahead, the big question is, "How much will regulators ask WorldCom and Sprint to give up?" The answer: It can't be much ... because there isn't much left to give. Sprint already has said it will sell its Internet backbone as an inducement to getting the deal done. On WorldCom's side, the fear in the markets is that a regulatory body here or across the pond will demand that the company give up its Internet business (

UUNET

), which CEO Bernard Ebbers has said, justifiably, is a deal breaker. It is a step the company will not even consider taking to get this deal onto the books.

Simply put, if you strip too much out of the deal, it just doesn't make economic sense anymore.

Moreover, if you accept the idea that the economic and public-policy justifications for regulatory review of mergers are to avoid anticompetitive combinations, the WCOM-FON troops shouldn't be

asked

to give up much.

On the long-distance side,

AT&T

(T) - Get Report

has more than twice the market share of consumer long-distance business that a combined WorldCom and Sprint would hold -- about 60% vs. 23%. I think you can make a pretty good case that by encouraging the formation of a strong No. 2 -- that is, a combined WCOM and FON -- to take on AT&T, regulators would be fostering, not inhibiting, competition.

In total business long-distance market share, the two are close. (In wholesaling minutes of long distance to other LD providers, WCOM-FON would have about twice T's share. But the dynamics of the wholesale-service market are very different from the rules of the road in direct sales.)

WorldCom really needs to close this deal, mainly for the wireless assets Sprint brings to the table. Not only does Sprint have a big presence in voice wireless services, it also has 2.7 million Web-enabled cell phones on its wireless network, with about 300,000 actual subscribers of its Web services. Sprint has also been big in "fixed wireless," which uses wireless transmission to solve the "last mile" problem: delivering a wide range of services to local customers without conflicts with local-service providers.

WorldCom, of course, has a terrible record in wireless, the importance of which long eluded CEO Ebbers. A couple of years ago, Ebbers and what was then called

MCI WorldCom

finally got religion on wireless -- but booted away in succession great opportunities to buy

Nextel

(NXTL)

, then

Vodaphone

(VOD) - Get Report

... and now, apparently, Britain's

Orange

, newly claimed by

France Telecom

(FTE)

.

I think the clear merits of this deal justify the regulators backing off.

In Europe, the big telcos aren't lining up before the EC to protest, a good measure of the deal's benign anticompetitive thrust. I'd like to say I think that will happen here, but it won't. But not for the obvious reason, to kill the deal.

U.S. telcos see a loud protest by them before the Justice Department and the FCC on this deal as a ploy that will help push the FCC into finally allowing the regional Bell operating companies to jump into the long-distance market -- one of their fondest dreams. So, their strategists think, if after a noisy but entirely

pro forma

protest on the WCOM-FON merger they will finally agree to sit down and shut up, the Justice Department and FCC will throw them a bone: access to that long-distance-services market.

Devious? Sure. Effective? Probably.

Will Bernie get what Bernie wants? I think so. Remember that he built today's WorldCom over the past few years through more than 60 deals, growing in the process from a funky paging company in a far corner of Mississippi to a world-class telecommunications powerhouse.

Ebbers and his No. 2, John Sidgmore, know more than a little about how to do deals and how to pacify regulators without giving away the farm.

This deal will be their biggest chance yet to flex those deal-making-savvy muscles. I think they'll make it work.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long WorldCom, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.