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Telecom Giants Nix Merger

WorldCom Inc. and Sprint Corp. Thursday officially nixed their $120 billion merger bid.

The potential unification of Sprint and WorldCom was undone by regulatory pressures exerted from both side of the Atlantic. One of the main reasons for its failure was concern over the concentration of backbone assets the new company would have controlled.

In a brief statement, Bernard Ebbers, WorldCom president and chief executive officer, said benefits of the merger had been clear and compelling.

"Opposition to the merger ultimately will reduce innovation and choice, and raise the cost of telephone services, for residential customers, particularly those in rural America," Ebbers said.

The merger plan was not well received by federal regulators from the moment it was announced last October. William Kennard, Federal Communications Commission chairman, initially said the combination of the two companies would stifle long-distance competition in the U.S.

When the U.S. Department of Justice announced it would scrutinize the merger, Kennard said consumers were better served by two companies, than one.

"I applaud the action by the Department of Justice to preserve competition and protect consumers," Kennard said. "In my view, American consumers are better served if these companies continue to compete rather than combine."

Bill Whyman, Precursor Group Inc. president, said U.S. and European regulators feared that the merger would cripple competition in Internet backbone services and long-distance telephone markets.

"The DOJ and FCC opposed the merger due to its ability to stifle competition in the long-distance market in the U.S.," Whyman said. "The European Union had a problem with the pact because the combined companies could own 70 percent of the Internet's backbone."

Whyman said the EU did not like the deal because it could have allowed one consolidated firm to monopolize data transport over the Internet.

"The EU opposed one party dominance of backbone services," Whyman said. "Customers naturally migrate to the fattest backbone with the biggest pipes in search of efficiency. A combined WorldCom and Sprint could have used their collective market power to degrade rivals connections, instill transit charges and end free peering."

WorldCom's Ebbers made it clear that the company would not part with its UUNET backbone facilities. At the same time, WorldCom said it might have parted with Sprint's backbone operations in order to gain regulatory approval of the merger.

Precursor Group's Whyman said that the merger has been dead for a long time, the statement made today merely throws dirt on the deal to bury it.

"Calling off the merger is no surprise," Whyman said. "The merger's been dead for a long time. Today's announcement is a tactical advance in that it enables both companies to cut ties and cease compliance with the no-shop provision, which kept each company out of striking new deals. Both companies are in play now."

The failure of the merger between the second and third largest U.S. long-distance companies has already prompted rumors that Deutsche Telekom AG may be interested in acquiring Sprint.

Wyman said that a Deutsche Telekom, Sprint deal stood a better chance of surviving regulatory scrutiny.

"A Deutsche Telekom, Sprint merger would not face the same regulatory woes," Whyman said. "It would allow federal regulators to leverage a trade deal with no implications of potential backbone or long-distance monopolies."