Megamerger Review Drags On

WHETHER A FEDERAL JUDGES review of the four recent RBOC megamergers will change how future deals are approved remains a matter of speculation. What regulatory experts do agree on is the judge has no plans to let the government walk on him as he examines whether the Department of Justice (DoJ) did due diligence in approving the combinations of Verizon Communications Inc. and MCI Inc., and AT&T Corp. and SBC Communications Inc. The case hinges on the premise that the DoJ too quickly, without enough investigation into the implications of the megamergers effects on competition, approved the transactions. This is the first case thats come up, I believe, under this requirement for more judicial discernment, and I think [the judge] feels a real obligation to do the right thing, says Heather Gold, senior vice president of government relations at XO Communications. She also is representing the Alliance for Competition in Telecommunications (ACTel), one of the groups supporting the courts review. ACTel especially is concerned that wholesale competition and the entire transport market were adversely impacted by the mergers.

Judge Emmet G. Sullivan

Earlier this year, Judge Emmet G. Sullivan of the U.S. District Court for the District of Columbia agreed to help decide whether the governments requirement that AT&T and Verizon divest some of their unused fiber networks was sufficient and in the public interest. The DoJ last fall said such a move would satisfy antitrust statutes. The case is based on the 1974 Tunney Act, which requires federal courts to approve antitrust consent decrees, or agreements, filed by the DoJ. A 2004 amendment allows a judge to independently determine whether mergers have served the public good. Cases based on the Tunney Act presume the government failed to consider the publics best interest.

When the mergers were under consideration, we told DoJ just divesting these building laterals does nothing because you have to have customers to support that investment, Gold explains. There was no guarantee they would have revenue to support those laterals. We thought the remedy was sort of silly. In July, Sullivan ordered the DoJ, Verizon and AT&T to submit material by early August demonstrating to the court that the consent decrees restore the competition the DoJ alleges will be lost as a result of the mergers. He told the defendants it is his duty to scrutinize the complaints brought by associations COMPTEL and ACTel, as well as a number of consumer-oriented groups. He added that he will not roll over just to please the feds. That August deadline was extended to give organizations such as COMPTEL ample time to respond to the governments statements, says Jonathan Lee, general counsel for COMPTEL.

What were trying to get out of this is honesty, says Lee, whose association represents competitive carriers, such as XO and InfoHighway Communications Corp. It sounds cliché and it sounds trite, but all were looking for is good government.

Even if this Tunney Act review does not result in the further divestiture of RBOC resources, it should mean greater scrutiny for future mergers. The proceedings have the potential to create a new standard, if you will, for these types of deals, says Bryan Tramont, a partner in Wilkinson Barker Knauer LLP, a Washington, D.C. communications law firm, and a former chief of staff at the FCC. Sullivan, Tramont adds, is aware of his precedent-setting role and wants to fulfill it to best of his ability.

Gold also says Sullivans consideration of the call to reconsider the consent decree bodes well. I thought these mergers were approved inappropriately quickly, she says, adding the CLEC challenge to the mergers involves such arcane issues, however, that consumers are not rallying around the push for competition as much as might be hoped. Its difficult to explain to everyone … about something that is an input to competition thats really where these mergers could hurt consumers because these big companies supply critical input to competition.

Although it is unlikely, if the merged RBOCs were required to do additional divestiture, I think it would change the nature of future reviews generally and particularly in telecom, and put a far brighter light on the competitive impact and the process at the DoJ and at the FCC, says attorney Tramont.

Based on Judge Sullivans actions thus far, the industry and the government have to take the case seriously since it has direct implications for the expected timeline for the FCC/DoJs upcoming examination of AT&Ts acquisition of BellSouth, writes Jessica Zufolo, senior policy director for Medley Global Advisors in a research note to clients. If this case extends through the fall, it will be very difficult for the FCC and the DoJ to use the previous merger analysis as a template for the [BellSouth-AT&T] merger, which until now had been largely expected.

AT&T Inc.
BellSouth Corp.
InfoHighway Communications Corp.
Medley Global Advisors
Wilkinson Barker Knauer LLP
XO Communications

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