WorldCom, MCI deal: the probe intensifies Concentration of power worries Justice Dept.

March 11, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

Federal regulators have intensified their investigation of the biggest merger in American corporate history.

The proposed $37 billion combination of WorldCom Inc. and MCI Communications Corp. would create a telecommunications colossus. However, the Justice Department is looking into whether the combined company would have too much power.

The department has issued civil subpoenas to some of MCI and WorldCom's competitors, including GTE Corp., Sprint Corp., International Business Machines Corp. and PSINet Inc., in an effort to determine how much control the new company would have over pricing and other market issues.

Analysts say the core issue is the Internet. While a combined MCI and WorldCom would become the fourth largest long-distance company, many observers say the new firm would have its biggest pull in the Internet market.

Critics of the merger contend that MCI and WorldCom would control about half of the Internet and could team up to set price terms on what has been a virtually untrammeled market.

Lawrence A. Sullivan, an antitrust professor at Southwestern University School of Law in Los Angeles, said, "I think the main area of concern is the Internet backbone. My speculation is that they won't really want to stop [the merger] for any other reason."

He said the issue of Internet control is "probably something that can be faced by spinning off" the so-called backbone functions that form the main highways of Internet commerce. Both WorldCom and MCI have made large investments in the acquisition of backbone networks.

Speaking from WorldCom's headquarters in Jackson, Miss., MCI bTC spokesman Jim Monroe said the concerns about the new company's Internet domination are overstated.

"We believe that if you are trying to approximate it, the only reliable way to do that is to measure revenue. Based on that, we would have approximately 20 percent of the market," he said.

Monroe said he did not think the investigation would hinder or delay the proposed merger. "We expect it to be completed on schedule in mid-1998," he said.

The Justice Department declined to comment on the investigation.

However, David N. Kunkel, PSINet's senior vice president and general counsel, confirmed that his company had received a civil subpoena in early January and a request for further information in early February. He called the Justice Department's inquiry "a broad investigation covering every aspect of our business," and said it is focusing on the share of the Internet market that MCI and WorldCom now hold.

Bill Schroeder, PSINet's chairman, president and chief executive officer, said MCI and WorldCom's claim to about 20 percent of the market is "a reasonable estimate" of the percentage of businesses the combined companies would serve.

"We're not opposed at all to the merger," Schroeder said. "We think it's a good move for shareholders and for customers. The issue is whether the leaders of the resulting entity intend to change the prices for the Internet. We would like them to not change that pricing unilaterally."

Some observers said they doubt that MCI and WorldCom could ever exert such control over a beast as unruly as the Internet. "Even somebody as big as MCI and WorldCom will not be able to completely change the Internet," said Bezalel Gavish, a Vanderbilt University professor who teaches telecommunications business issues. "They will have influence at the margins, but only at the margins. The Internet is too big and too independent."

John Robb, a consultant with Gomez Advisors Inc. in Boston, said, "They would have pricing power potential in the short term, but in that long term the availability of bandwidth is increasing so rapidly, anyone who tried to establish a roadblock would be bowled over."

The Federal Communications Commission, the governmental body with perhaps the most direct interest in the MCI-WorldCom merger, is not involved in the Justice Department investigation. An FCC official said the commission would be legally required to get a waiver from MCI and WorldCom if it wished to talk to the Justice Department about the present investigation.

"We have not sought such a waiver," the official said.

Pub Date: 3/11/98

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