German Firm’s Telecom Bid in U.S. Stirs Rancor

A bid by Germany’s Deutsche Telekom to buy Bellevue, Wash.-based VoiceStream Wireless Corp. for $46 billion triggered a flurry of calls Monday in Congress to block any foreign government ownership of U.S. telecommunications firms.

Because the German government owns 56% of Deutsche Telekom, Europe’s biggest phone company, Sen. Ernest F. Hollings (D-S.C.) and Rep. John D. Dingell (D-Mich.) promptly introduced measures to block the deal.

“I don’t see how they [Deutsche Telekom] possibly could be approved under the law,” Hollings told reporters on Capitol Hill. “We didn’t deregulate the American [telecom] industry to put it under the Germans.”

Rep. W.J. “Billy” Tauzin (R-La.), chairman of the House Telecommunications subcommittee, said he plans to hold hearings to scrutinize the deal.

“Foreign ownership of a U.S. telephone company is one thing; foreign government ownership raises concerns about national security” and fair competition in the marketplace, Tauzin said through a spokesman.

Federal law prohibits sale of a U.S. telecommunications firm to any company more than 20% owned by a foreign company or foreign government, or to a company 25% indirectly held by foreigners. Regulators may waive that provision if a deal is found to be in the public interest.

But White House officials, concerned that the Capitol Hill criticism could trigger a trade dispute with Europeans--involving everything from agricultural products to automobiles--were quick to discourage any groundswell for protectionist telecommunications legislation.

“We don’t comment on individual mergers . . . but we have three existing and distinct processes for reviewing such transactions and we think they can address concerns about competition and national security,” White House Deputy Press Secretary Jake Siewert said.

Deutsche Telekom Chief Executive Ron Sommer is attracted by VoiceStream’s 2.3 million cell phone subscribers as well as its licenses to sell service in most of the nation. They see a purchase of VoiceStream as a way to aggressively enter the U.S. wireless phone business.

Although VoiceStream is unprofitable and is a second-tier player in the U.S. cell phone market, its purchase by Deutsche Telekom would represent the first acquisition of a U.S. phone company by a corporation controlled by a foreign government.

Verizon Wireless has 25 million U.S. cell phone subscribers, AT&T; Wireless has 12.5 million mobile customers and Sprint PCS has 6.5 million. They are among the dozens of U.S. wireless companies that collectively are signing up more than 45,000 new wireless subscribers a day.

Both Deutsche Telekom and VoiceStream use the GSM (global system for mobile communications) protocol, a technology widely used for wireless phone service in Europe. But GSM operates on a different frequency in the U.S. than in Europe. Therefore, customers seeking full use of their cell phones on both sides of the Atlantic would have to purchase a dual-mode GSM phone. Deutsche Telekom sees a huge market in which it can supply consumers around the globe with go-anywhere phones that can do everything from storing address lists to accessing the Internet. The company has $100 billion to spend and is eyeing American telecommunications firms to help it leapfrog AT&T; and become the dominant international telecom company.

To ease the way for phone companies to engage in such market expansion, the United States and other members of the World Trade Organization pledged in 1997 to do away with protectionist laws and approve phone deals unless they threatened national security or thwarted competition in the market.

The stocks of both Deutsche Telekom and VoiceStream fell sharply Monday, in part over regulatory worries. Deutsche Telekom’s shares plunged $6.50 to $45 on the New York Stock Exchange, while shares in VoiceStream slumped $21.25 to $128.50 on Nasdaq. Deutsche Telekom will offer 3.2 of its shares, plus $30 in cash, for every share of VoiceStream.

If the deal goes through, the German government’s stake in Deutsche Telekom will fall to about 45%. The German government said it wants to sell the rest of its stake in DT, but has not set a timetable.

The bid by Deutsche Telekom for VoiceStream comes less than a month after strong European opposition led to the unraveling of a $129-billion mega-merger between U.S. long-distance carriers WorldCom Inc. and Sprint Corp.

Some analysts think European criticism of that deal helped fuel American political opposition to VoiceStream’s purchase by Deutsche Telekom.

“It’s too coincidental after the WorldCom-Sprint deal,” said Scott Cleland, a technology analyst at the Precursor Group consulting firm in Washington. “This is payback” for the collapse of the WorldCom-Sprint merger.

The proposed purchase will be reviewed by three U.S. agencies.

The FCC will examine the deal to determine whether it is in the public interest, the Justice Department will look at any antitrust issues and the Treasury Department will determine whether the deal raises any national security concerns.

At a meeting Monday of the National Assn. of Regulatory Commissioners in Los Angeles, FCC Chairman William Kennard declined to comment on the deal.

But last week in a letter sent to Capitol Hill, Kennard told Congress his agency will closely scrutinize the deal. European Union officials have said the U.S. Congress would be violating the WTO accord if it were to pass a law limiting foreign government ownership of U.S. phone companies.

While most analysts believe the Deutsche Telekom purchase of VoiceStream will ultimately be approved, many held the same rosy view of the WorldCom-Sprint merger before the U.S. Justice Department went to court in June to block it.

What’s more, some analysts believe Hollings has shrewdly sought to attack the deal through an appropriations measure that would withhold money the FCC needs to review the deal, rather than try to craft new legislation. Hollings said 30 of his fellow members of Congress recently voiced their concern about foreign government ownership of U.S. phone companies in a letter.

But some analysts think the outcry is misguided.

“I think [the congressional criticism] sends the wrong message at a time when the U.S. is trying to get other countries to deregulate their telecom markets,” said Larry Darby, who once presided over regulation of the U.S. telephone industry as head of the Federal Communications Commission’s common carrier bureau.

“In terms of [telecom] deals getting done, 95% of the time it’s a U.S. company that is the acquirer,” Darby said.

“It’s a stretch to argue that this deal threatens national security when Germany is one of our closest allies” and VoiceStream has a comparatively small number of customers, he said.