Sprint Corp., the U.S.’s No. 3 enterprise network and Internet backbone provider, went through the legal wringer late last month and still came out in one piece — and is likely to remain that way even if it eventually gets sold.
Prospective new bidders for Sprint, most prominently Germany’s Deutsche Telekom AG, began lining up after the U.S. Department of Justice squashed WorldCom Inc.’s 9-month-old proposal to buy Sprint with a devastating federal lawsuit.
The fact that Sprint could now wind up in the hands of a new owner with little or no overlapping services provided at least a temporary sense of relief to users and Sprint’s employees, who feared a loss of Sprint’s independence under an MCI WorldCom takeover.
The Justice Department’s suit blocked MCI WorldCom’s path to consummate its proposed US$115 billion purchase of Sprint, and analysts say also foiled any plans MCI WorldCom had to dismember Sprint and pick off the pieces it liked best.
The 65-page filing in U.S. District Court systematically accused MCI WorldCom of seeking to merge with Sprint in order to dominate the market in almost every voice, data and Internet service for business and residential customers except wireless, where Sprint is a big player but MCI WorldCom is not. The thoroughness of the government’s indictment sent a signal to MCI WorldCom to move on and clear the field for other Sprint bidders, said Hank Levine, a Washington, D.C., lawyer who negotiates user contracts with carriers.
“They’re not interested in having a quibbling negotiation,” Levine said. “They’re saying if [MCI] WorldCom wants to keep the [Sprint] wireless thing, we can work that out, but that’s all.”
Justice Department Antitrust Chief Joel Klein reinforced the idea that Sprint is still in play, as long as it’s not with a direct competitor like MCI WorldCom. He denied the Justice Department acted simply because MCI WorldCom and Sprint are big, and the government is tired of telecom consolidation.
Instead, Klein noted MCI WorldCom and Sprint offer services that are widely viewed as substitutes for each other in the same territory. Deutsche Telekom, which at week’s end was reportedly preparing a US$100 billion offer for Sprint, would not likely be considered the same way. Indeed, in a similar situation in 1998, the Justice Department approved the takeover of No. 3 U.S. automaker Chrysler by the German automaker Daimler-Benz to form what is now DaimlerChrysler.
If anything, while the Justice Department objected to seeing the MCI and Sprint brands join for residential telephony, it was MCI WorldCom and Sprint’s disproportionate strength in the corporate data-networking market that cinched the government’s decision to block the merger.
For example, the Justice Department calculated the two companies would control at least 55 per cent of the frame relay market. “By acquiring Sprint, [MCI] WorldCom would eliminate one of its principle rivals in the [frame relay] market, which would lead to higher prices and lower service quality,” the lawsuit claimed.
The advantage was even starker for ATM, for which the combined companies would have enjoyed a 70 per cent market share. The government also objected to MCI WorldCom adding Sprint’s Internet backbone to its UUNET division, although Sprint had offered to shed its Internet unit.
Inside Sprint, a vivid contrast emerged as top executives claimed they were still trying to salvage an arrangement with MCI WorldCom even as the rank and file privately cheered the apparent collapse of the deal.
“We’re not upset by the merger news,” said a source inside Sprint’s sales division. “We’ve known for a long time in this department that we would never be part of the [WorldCom] merger. With another [Sprint buyer] we can be the jewel in their crown. At [MCI] WorldCom we’d always be second fiddle to UUNET.”
Users have generally credited Sprint with not letting service quality slip despite merger uncertainty. Still, observers say Sprint employees may have to recover their bearings after hunkering down in fear of working for MCI WorldCom CEO Bernard Ebbers, whose cost-cutting and restructuring moves are well-known after 60 acquisitions.
“The biggest problem that I observed among the Sprint folks was that we all didn’t like the Ebbers [MCI] WorldCom culture,” said a Sprint on-site contractor who asked not to be identified.
“Sprint took a big hit on the talent pool because job offers were coming out of our ears. We lost quite a bit of people due to the concern of [MCI] WorldCom practices.” Sprint’s hometown newspaper, The Kansas City Star, reported that some Sprint employees shared high-fives over their cubicle walls when the Justice Department suit was announced.
But a nail-biting period likely looms for Sprint. Analysts are debating whether BellSouth, which considered a bid for Sprint last year, will now make an offer after seeing long-distance profit margins fall. Levine, for one, said he hopes not. A Sprint/BellSouth fusion would contain the same challenges present in Qwest’s takeover of US West, which ironically received final government approval last week.
Just as Qwest has had to temporarily exit the long-distance market for the US West territory, a Sprint/BellSouth merger would force Sprint to shed its operations in BellSouth’s nine states, “and the big Sprint users would go nuts,” Levine said.