When Elephants Fight

NTT Communications, sibling to Japan’s telecom giant Nippon Telegraph
and Telephone
, is getting the probe over its proposed
$5.5 billion cash acquisition of Web host provider Verio . The rubber glove treatment comes from the Committee on
Foreign Investment in the United States (CFIUS), a mixed bag of nuts from
the Beltway that normally investigates meatier issues related to national
security.


This mystery gets filed under oddball, and that usually means an ulterior
motive is at work. Which of course there is, and if you follow the bread
crumbs, they’ll lead you to some interesting food for thought. Here’s how
it breaks down.


The CFIUS finds its roots in the Exon-Florio Amendment, which gives the
committee the curious authority to scrutinize and axe foreign investments
in U.S. corporations. If the panel smells a so-called threat to national
security, the recommendation falls on the President’s desk, and it’s
curtains for the proposed investment. The bombshell here is that “national
security” isn’t defined under Exon-Florio whatsoever. Which leaves plenty
of room for Gestapo-like tactics.


This latest funny business can be explained by a not-so-coincidental
dispute running in lockstep with the merger scrutiny. NTT is majority owned
by Japan’s government and has a stranglehold on nearly all of the local
landlines in Japan. The U.S. has been thumb-wrestling for some time over
NTT’s local connection fees that it charges competing carriers to tap into
its network.


Congressmen have been stamping their feet over the Verio buyout, pressuring
the U.S. government to use the proposed deal as a stick-and-carrot to force
Tokyo to trim its fees. Lawmakers, not above hardball tactics, are looking
for a 40% fee reduction, while Tokyo, like any seasoned monopoly, has
predictably countered with 23% over the next four years.


While NTT Communications operates separately from its NTT parent’s telecom
units, the company is getting saddled with guilt by association. NTT
Communications is a pawn in this entire affair, and the CFIUS investigation
is little more than a smokescreen for hot potato politicking.


But apparently, it’s effective. In a thinly-veiled response to the pending
scrutiny over the Verio/NTT Communications deal, NTT released a statement
an hour later indicating that it was unopposed to speeding up the talks
over reducing connection fees.


Verio’s share price took the brunt of the fallout over this latest
brouhaha. Retail investors were treated to a 10% haircut on the heels of
the news, and still have yet to recover the lost ground. It just goes to
show you, when elephants fight, only the grass gets trampled.


Any questions or comments, love letters or hate mail? As always, feel free
to forward them to [email protected].


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