New Roadblocks Face Verizon-MCI Merger

An alliance of telecom competitors has filed a petition with the FCC, urging the regulatory agency to block Verizon from acquiring MCI. In the background, MCI shareholders are trying to

May 10, 2005

3 Min Read
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Before Verizon Communications brings home the MCI bacon, it's becoming apparent that it will have to pass through a rough obstacle course. A group of smaller telecommunications competitors called the Alliance for Competition in Telecommunications (ACTel) filed a petition with the FCC Monday urging the regulatory agency to block Verizon from acquiring MCI.

At the same time, large MCI stockholders, seeking to raise the $8.44 billion price that Verizon has agreed to pay for MCI, are drumming up support for an earlier rival bidder for MCI--Qwest Communications International--to re-ignite the bidding. In addition, the deal hasn't been enhanced by revelations this week that MCI may owe hundreds of millions of dollars in back taxes.

Yet another potential monkey wrench is news that the Justice Department's top antitrust official is stepping down, placing in limbo, at least temporarily, any investigation of the Verizon-MCI combine. R. Hewitt Pate, the DOJ's assistant attorney general for antitrust, won't be on the job to review the proposed merger, nor will he be there to review the proposed acquisition of AT&T by SBC Communications.

In its petition to the FCC, ACTel argues that taken together, the merging of MCI and AT&T into former Baby Bells Verizon and SBC, respectively, will put many independent telecommunications companies at a disadvantage.

ACTel's membership is centered on telecom firms that provide services primarily to business customers. "Our companies are all B-to-B-focused," said Chad Couser of XO Communications, who is serving as a spokesman for ACTel. While MCI and AT&T are strong in consumer long-distance services, it is their dominant offerings to business customers that make them so attractive to Verizon and SBC.Couser noted that ACTel has also filed a similar complaint with the FCC seeking to block SBC's acquisition of AT&T.

In its petition against the Verizon-MCI deal, ACTel raised the specter of a continuing telecom industry concentration that it said would result in "reduced choices, slower innovation, and higher costs for businesses and consumers--and of even stronger monopolies bent on controlling the market, heedless of laws."

The group charged that approval of the mergers would undo the spirit and law of the 1984 Consent Decree that broke up AT&T and the pro-competitive content of Congress' Telecommunications Act of 1996. In a statement, ACTel said: "In tandem with the planned SBC/AT&T merger, the proposed Verizon-MCI merger increases Verizon's opportunities for coordinated anticompetitive conduct.

"In key metropolitan markets such as New York, MCI's bids on business service contracts have been significantly lower than Verizon's -- for example, $110 less per month than Verizon, per DS1 circuit. Under the merger, prices in this instance would rise $110 to Verizon's level. Similar price increases would hit business customers across-the-board.

"Historically, Verizon and SBC have refrained from competing in one another's market, violating the requirements of past mergers. The likelihood is that this predilection to avoid direct competition, even in adjacent markets, will continue after their respective new mergers."Couser said the ACTel members that filed the petition in addition to XO Communications were Cbeyond Communications, Eschelon Telecom, NuVox Communications, and TDS Metrocom. Another non-ACTel member, Conversent Communications, also joined in filing the petition with the FCC.

Qwest withdrew from the bidding earlier. MCI had rejected its high bid of $9.74 billion after MCI said Verizon's strong financial position and other factors made the Verizon bid more attractive. However, some of MCI's major stockholders are still hoping to entice Qwest to return and the Denver-based company is said to be considering their entreaties.

Verizon and SBC deny their acquisitions are anti-competitive, arguing that they, in fact, stimulate competition. In a typical statement, SBC's Chairman and CEO Edward Whitacre recently told a Congressional committee that SBC's proposed acquisition of AT&T would be "a very positive development for customers, for competition, and for America's leadership in the global communications marketplace."

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