IP: FCC, Faced With Telecom Crisis, Could Let a Bell Buy WorldCom

[David Farber <dave () farber net>]

> July 15, 2002
>
> FCC, Faced With Telecom Crisis,
> Could Let a Bell Buy WorldCom
>
> By YOCHI J. DREAZEN
> Staff Reporter of THE WALL STREET JOURNAL
>
> WASHINGTON -- Declaring the telecommunications industry in a state of
> "utter crisis," the chairman of the Federal Communications Commission
> suggested his agency could allow a Baby Bell to take over WorldCom
> Inc., a combination once seen as unthinkable.
>
> FCC Chairman Michael Powell said the telecommunications industry is
> in a state of "utter crisis" brought about by a wave of bankruptcies,
> accounting scandals, and plunging stock prices.
>
> The last two years have been rough on telecom companies by any
> measure. * At the end of 2000 there were 330 competitive
> local-exchange carriers challenging Baby Bells. Today there are fewer
> than 80.
>
> A merger of a large regional phone carrier and the nation's
> second-largest long-distance company would reverse the FCC's position
> on such deals. It could also revive the spirit of AT&T's monopoly
> before the 1984 court-ordered breakup that created the regional Baby
> Bells, by allowing one company to control huge swaths of both markets.
>
> But in his first public comments on the unfolding WorldCom scandal,
> FCC Chairman Michael Powell said the industry's battered, debt-ridden
> condition now leaves regulators little choice but to consider such
> options, especially if the alternatives would disrupt phone and data
> service to WorldCom's 20 million customers. To keep WorldCom's
> operations stable, he also called for the government to continue its
> billions of dollars in federal contracts with the company, rather
> than pull back as some White House officials have suggested.
>
> Mr. Powell cautioned that a Bell's bid for WorldCom would still be
> far from certain to win regulatory approval. But one remedy for the
> broader industry's ills, he said, could be major consolidations along
> the lines the defense industry went through in the 1990s.
>
> "There are plenty of doctrines in antitrust and competition policy
> that would take into consideration the duress and state of the
> market," said Mr. Powell, who in the Clinton administration was a top
> official of the Justice Department's antitrust division. "If a Bell
> company brought a deal to us, that would certainly be part of the
> consideration."
>
> Just five years ago, then-FCC Chairman Reed Hundt helped sink a
> potential $50 billion merger between the Baby Bell SBC Communications
> Inc. and AT&T Corp. -- still the leading long-distance carrier -- by
> publicly labeling such a combination "unthinkable" because of its
> size.
>
> A deal between a Bell and WorldCom also could lead to further
> consolidation as the other Bells scrambled to acquire AT&T and Sprint
> Corp. as a way of keeping pace. Mr. Powell, however, suggested that
> Bells probably would have trouble affording such acquisitions.
>
> Damage to the telecommunications sector, the FCC chairman said,
> extends far beyond ailing companies such as WorldCom, Global Crossing
> Ltd. and Qwest Communications International Inc. Even relatively
> stable companies such as Verizon Communications Inc. and SBC face
> huge challenges now that lenders are extremely hostile to telecom
> companies.
>
> "The real problem is that there was a collapse in this sector, a
> crisis in this sector, even before all of this happened," he said,
> noting that WorldCom's share price had plunged to $1 before the
> accounting scandal broke. "That's why this is so painful to the
> telecom market -- talk about something that was down on its knees and
> didn't need to be kicked in the gut."
>
> Mr. Powell said a big concern is that other telecommunications
> companies may be hiding their own accounting irregularities. He
> declined to name specific companies, but said his agency is trying to
> be prepared for the impact a bankruptcy filing by WorldCom or other
> carriers would have on their customers.
>
> In a wide-ranging interview in his office where an oversized
> flat-screen computer monitor sits on a sprawling desk, Mr. Powell
> said the government bore some responsibility for the industry's
> problems, which began with the frenzy to create new companies
> following the landmark 1996 Telecommunications Act. The law allowed
> Bells and long-distance companies to enter each other's markets to
> foster increased competition, but didn't address the prospect that
> they would look to acquire each other and reduce the number of
> competitors.
>
> Mr. Powell said that he thinks the FCC may have erred in the past by
> implicitly encouraging the formation of hundreds of Bell competitors
> without realizing how few of them would ultimately be able to
> survive. Many of those companies borrowed heavily to finance their
> quick expansion but have since filed for bankruptcy or appear likely
> to do so in the near future.
>
> "We correctly believed these markets didn't need to be natural
> monopolies and they could be competitive, but I think we tended to
> over-exaggerate how quickly and how dramatically it could become
> competitive," Mr. Powell said.
>
> Pressure to show profits apparently led companies such as WorldCom to
> cook their books when their performance failed to live up to
> expectations. "It wouldn't shock me," Mr. Powell said, "if there were
> more companies that couldn't resist those pressures honestly."
>
> Mr. Powell's remarks came days after former WorldCom executives
> accused of artificially inflating the company's revenues by almost $4
> billion angered lawmakers at a congressional hearing by refusing to
> testify. One of the executives, former WorldCom chief financial
> officer Scott Sullivan, has told the company's internal investigators
> that ousted chief executive officer Bernard J. Ebbers knew of his
> plan to shift billions of dollars of normal expenses into capital
> expenditures accounts, boosting the company's earnings, congressional
> investigators said. Mr. Ebbers's attorney denies that account.
>
> Mr. Powell said Messrs. Sullivan and Ebbers deserve to be punished
> for their roles. "At the end of the day, the officers of a
> corporation are responsible for the credibility and value of that
> corporation," Mr. Powell said. "This was classic dime-store fraud,
> and it may have spread deep into the company like a cancer."
>
> Nevertheless, he made clear the company's long-distance and data
> services operations need to be kept stable, though the General
> Services Administration is reviewing WorldCom's government contracts
> and the White House has said it might bar federal agencies from
> signing new deals with the company.
>
> The government "ought to be very, very careful about adding to the
> circumstances that might collapse the company," he said. "This is a
> significant company whose assets are critical components of the
> entire network. It would be messy if they became unavailable."
>
> WorldCom's current management, including new CEO John Sidgmore, said
> Thursday that a bankruptcy filing by the company, based in Clinton,
> Miss., was looking increasingly likely. Protecting WorldCom's
> business and residential customers is rapidly becoming a hot
> political issue. On Friday, Senate Commerce Committee Chairman Ernest
> F. Hollings wrote Mr. Powell that his "foremost responsibility is to
> protect the integrity and reliability of the nation's
> telecommunications network." The South Carolina Democrat also asked
> Mr. Powell to detail the agency's contingency plans.
>
> At this point, Mr. Powell said, WorldCom's officials and lenders have
> given assurances that the company would continue to fully maintain
> its voice and data networks. "It's going to be a tricky situation
> because there will need to be a major restructuring of the company or
> its assets that doesn't lead to service outages," Mr. Powell said.
> "We're watching closely, but for now both the company and the banks
> believe that keeping the networks running is in everyone's best
> interest."
>
> Still, he said, "things are becoming more acute by the day."
>
> Write to Yochi J. Dreazen at yochi.dreazen@wsj.com2
>
>         URL for this article:
> <http://online.wsj.com/article/0,,SB1026696580457716480.djm,00.html>

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