Reports that the






merger may be crashing on the rocks of a potential federal antitrust case appear to be overblown.

Demonstrating that chest-pounding is the first stage of negotiations, the

Justice Department

has shown a willingness to get tough as it sits down with pending merger partners WorldCom and Sprint. As the

Wall Street Journal

reported this morning, Justice staffers are preparing to recommend blocking the deal as currently proposed. But insiders say that this is just the first step in a process to modify the deal, which WorldCom says it believes will still go through.

"I think a lot of what you see is positioning at the beginning of a negotiation," said one high-ranking expert based in Washington.

Federal antitrust officials have made it clear they have a strong case to fight the merger of the nation's No. 2 and No. 3 U.S. long-distance providers on the grounds that it would put too much of the market in too few hands. But seasoned merger watchers say this stance has less to do with the past realities of market share and more to do with showing a strong bargaining position that would put WorldCom President and CEO Bernie Ebbers in check.

Sprint has already indicated a willingness to divest its Internet backbone to appease antitrust fears from the

European Union

. The remaining issue is how to lessen the concentration of the long-distance market held by the combined company.

The likely scenario now, in addition to divesting its Internet backbone, is that some or all of Sprint's consumer long distance will need to be sold off. That may take the form of customer lists or outright divestiture of the network itself, a process that may take as long as nine months, said analysts.

Possibly unwittingly, Ebbers forced the DOJ to take a strong stand.

Ebbers is the driving force in the WorldCom juggernaut and in a typical take-no-prisoners approach has said there were limits to how much he would concede to regulators to make the merger go through. Namely, he's said he would not divest WorldCom's Internet subsidiary



"If the Justice Department thought the long-distance market was a major concern would they show they are willing to fight for it? The answer is yes. What would I get out of a party that thinks I'm not going to put up a fight? Nothing," said the Washington expert who spoke on the condition of anonymity.

Analysts said the typical route to a merger involves a fairly well-understood process of divesting overlapping networks and customer services.

"Regulators always come out with their worst-case scenario so they have some ground to give during the negotiation process," said

Edward Jones

telecommunications analyst Mel Marten, who has a buy on Sprint and a strong buy on WorldCom. Edward Jones has no banking ties to either company.

"In order to block the merger they need to show the combined company could raise prices or prevent prices from falling. You'd have to have a lapse of common sense to think that that is really possible," said Marten.

Old notions of long distance may not necessarily apply to current market realities. As AT&T's earnings report demonstrated last month, consumers are turning to wireless calls and Internet telephony for their long-distance calling much more quickly than anticipated, foretelling a faster erosion of the traditional long-distance market.

WorldCom is currently meeting with high-level DOJ officials and will continue to make its case over the next few weeks in support of the Sprint merger, according to a person close to the company. "There's been no discussion of remedies with the DOJ yet," the source said. A WorldCom official declined to comment and the company's general counsel, Michael Salsbury, didn't return a call.

When Sprint agreed to be acquired by WorldCom last October for $129 billion, it was the largest acquisition to date. The deal marked an about-face for the country's second-largest telephone carrier, which had previously stated it didn't need a mobile-phone network. WorldCom gained customers and an Internet backbone, but its primary interest was

Sprint PCS

, Sprint's wireless unit.

WorldCom was, in fact, initially in negotiations with

Nextel Communications


, which only offers mobile-phone service. But the parties couldn't agree on a price, prompting WorldCom to walk away and seek out Sprint. WorldCom has since become so aware of the need to offer wide-reaching wireless-phone service that it's setting its sights overseas and preparing to bid for the U.K.'s third-largest mobile-phone carrier,



WorldCom share prices, which have been slumping for the past 10 months, should see a significant rise once the company clears the regulatory hurdles and closes the deal, said analysts. Shares were at 40 7/16 in early morning trading, down 3.72% for the day. The stock's 52-week high is 64 1/2.

Assuming the merger goes through, and after they get a good quarter behind them as a combined company, "I think you'll see the stock hit some new highs," said Marten.