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TELECOM GIANTS IN TALKS

How Deal Would Affect Local Service

November 02, 1996|KAREN KAPLAN | SPECIAL TO THE TIMES

When President Clinton signed the Telecommunications Act of 1996 early this year, industry leaders, analysts and regulators predicted a slew of mega-mergers that would ultimately result in a handful of global telecommunications giants. The industry moved closer to that day on Friday, when MCI Communications Corp. and British Telecommunications revealed they are negotiating a merger.

If the deal happens, it will probably hasten MCI's entry into the local telephone business and will present significant new competitive challenges for AT&T, Sprint and the regional Bell operating companies, including Pacific Telesis and its proposed merger partner, SBC Communications.

Here are some answers to questions about Friday's announcement:

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Q. Did BT buy MCI?

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A. No, but the two companies announced Friday that they are in talks to merge. Such a deal would require the approval of the Federal Communications Commission, which must grant a waiver of rules limiting foreign ownership of American telecommunications companies.

Because London-based BT is from a country with a competitive telecommunications market, analysts expect the FCC would give the deal its blessing.

Also, because BT is primarily a local phone service company and MCI concentrates on the long-distance market, antitrust objections are not likely to arise, experts said, though the Justice Department would also review the deal.

A merger agreement is expected to be announced over the weekend.

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Q. If the merger goes through, will MCI begin offering local phone service sooner?

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A. Earlier this year, MCI announced plans to compete aggressively in the newly opened market for local phone service by early 1997, which has been dominated for decades by regional Bell operating companies. But such an endeavor will require many billions of dollars. A combined BT-MCI would be in a much better position to make such an investment than MCI alone, and BT--unlike MCI--has substantial experience in the local phone business.

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Q. Would that be good for consumers?

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A. Probably. Consumer advocates--who normally complain that large-scale mergers and acquisitions eat away at competition and raise the specter of higher prices--actually offered tentative praise for the deal Friday.

"In the wake of the new Telecommunications Act, we've been concerned that there would be mergers among long-distance and local phone companies, and that a Bell might purchase MCI and actually reduce the number of players competing head-to-head," said Gene Kimmelman, co-director of the Consumers Union's office in Washington. "The advantage of this deal from a consumer's perspective is that there will be more choices and more options in the marketplace."

That competition should discourage the Baby Bells from raising rates in the post-regulation era.

But MCI, historically a highly aggressive marketer, might lose some of its edge if its would-be parent company takes a heavy hand in U.S. affairs.

"The senior management of BT is a monopolist who has not faced or responded very aggressively to competition in the U.K.," said Mark Cooper, research director with the Washington-based Consumer Federation of America.

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Q. What will businesses have to gain?

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A. Analysts say that a BT-MCI merger would help MCI lure business customers in the lucrative long-distance market, where the company made its name by fighting AT&T for the right to compete.

"Large business customers do care about how big you are and how global you are, and this adds some cache," said Anna-Maria Kovacs, first vice president of the Boston-based investment firm of Janney Montgomery Scott.

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Q. What does this mean for the Baby Bells and other phone companies?

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A. MCI and other companies that are trying to enter the market for local phone service have been complaining that the Bells and GTE Communications--which together provide dial tones to most of America--have been slow to comply with FCC orders designed to spur competition. Incumbent local phone carriers must allow newcomers to negotiate interconnection agreements and lease access to their networks so that they can gain a foothold in the historically monopolistic business.

An MCI backed by BT, with its deep pockets, would be a particularly formidable competitor to the Baby Bells. Pacific Bell executives declined to comment Friday on the potential impact of an MCI-BT merger.

The deal could also hasten additional mergers, such as the one pending between Pacific Telesis and SBC, said Robert Wilkes, an analyst with Brown Bros. Harriman in New York.

Shares of Sprint and other long-distance companies rose Friday in anticipation of a new wave of merger activity.

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