Wall Street's conventional wisdom is that the antitrust issues raised by the $67 billion merger of AT&T ( T) and BellSouth ( BLS) are much ado about nothing. It might be wrong.

The thinking on the Street is that the Justice Department will give the merger an obligatory hard look but ultimately confer its official blessing on the big telecom deal. Few expect a Republican administration to erect roadblocks to the transaction, especially since old-fashioned phone lines are no longer viewed as a household necessity.

"If you are making a phone call, you can now use cable, VoIP, traditional twisted pairs or wireless,'' says a trader with a Wall Street merger arbitrage firm. "Since there is no geographic overlap between the two companies, any antitrust argument is going to be pretty weak.''

Still, others say Wall Street would be in for a rude surprise if Justice Department antitrust attorneys raise objections about the deal on grounds that it would limit consumer choices in southeastern and southwestern states.

The deal also is likely to get a grilling from legislators on Capitol Hill. Some predict that state attorneys general could get into the act if the Justice Department isn't aggressive enough.

Critics say regulators may feel they have no choice but to hold up the megadeal out of fear that it will spur copycat acquisitions by AT&T's main competitors, Verizon ( VZ) and Sprint Nextel ( S). If the Justice Department allows the AT&T-BellSouth deal to go through in its present form, critics say, regulators will be hard-pressed to object to any future telecom deals.

"They have to look at this pretty seriously,'' says David Balto, an antitrust attorney with Robins Kaplan Miller & Ciresi in Washington, D.C., and former policy director for the Federal Trade Commission's bureau of competition. "You have to draw the line someplace.''

Balto says that if regulators don't block or scale back the AT&T-BellSouth deal, the nation ultimately will be left with two giant telephone networks. If that were to occur, the telecommunications landscape would be as uncompetitive as it was in 1984, when the federal courts ordered the breakup of the old AT&T into several regional telephone companies.

"A duopoly is a recipe for incredibly high prices and a lack of innovation,'' says Balto.

Two consumer groups, Consumer Union and Consumer Federation of America, were quick to call upon antitrust regulators to either strike down the deal or force AT&T to spin off its Cingular wireless telephone business. After the merger, AT&T would control all of Cingular, the nation's largest wireless phone service.

In the past year, the pace of consolidation in the telecom business has accelerated. The deal between AT&T comes just four months after San Antonio's SBC closed on its acquisition of New Jersey's AT&T for $16 billion. After that acquisition, SBC adopted AT&T's better-known name. When the SBC/AT&T deal was announced, most analysts on Wall Street expected Verizon to respond with its own deal. Sure enough, two weeks after the SBC/AT&T deal was announced, Verizon said it was acquiring MCI.

In anticipation that Verizon will quickly respond to this latest megadeal, shares of two potential targets, Qwest ( Q) and Alltel ( AT), were both trading sharply higher.

In a conference call Monday, officials with AT&T and BellSouth gave short shrift to the notion that regulators would prove to be an obstacle to completing the merger. "We don't see any regulatory issues associated with our pricing,'' says AT&T Operating Chief Randall Stephenson.

Fans of the deal say concerns about pricing are overstated, given that telephone companies now face stiff competition from cable companies such as Comcast ( CMCSA) and Time Warner ( TWX). Consumers also are turning to upstart companies such as Vonage and IDT ( IDT) to provide Internet-based phone service, or VoIP technology -- voice over Internet protocol.

Indeed, some argue, the Justice Department paved the way for the consolidation of the so-called Baby Bells when it failed to object to the 1996 merger of Bell Atlantic and Nynex. The $50 billion deal created the present-day Verizon.

The Bell Atlantic-Nynex deal was approved by the Clinton administration's Justice Department. Ironically, regulators working for a Democratic president approved the deal over the opposition of former New York attorney general Dennis Vacco, a Republican.

Stephen Houck, who headed Vacco's antitrust litigation team and now is an attorney with Menaker & Herrmann, says state attorneys general have a history of bringing antitrust cases when a merger has an impact on a particular geographic area. Houck says it wouldn't surprise him if state lawyers get more active in antitrust disputes, especially if they believe the Justice Department is taking a more passive role.

"The AGs in the geographic areas probably would be motivated to take a look at this,'' says Houck. "This is something they would be motivated to do, whether they are Republican or Democrats."

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