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Tuesday, October 5, 1999 Published at 17:11 GMT 18:11 UK

Business: The Company File

Driving the telecoms merger wave

A wave of mergers has swept through Europe and America

The $129bn merger between two US long-distance telephone companies is only the latest stage in the growing drive for consolidation in the world telecoms industry. BBC News Online looks at what is driving the merger wave.

The telecommunications industry is in turmoil. Mergers are sweeping through the industry, both in the United States and Europe, driven by the need to gain critical mass for the technological revolution sweeping the industry. Old boundaries are losing their meaning as telephone, video, and Internet connections all are sent through the same connection.

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The huge sums being paid for telecoms companies also reflect the fast-growing nature of the industry, as demand for new services like mobile phones and high-speed Internet services boosts sales and profits.

The accelerating pace of deregulation, both in the United States and Europe, has provided companies with another reason to merge now or be left behind as national boundaries are eroded.

Even before this merger, telecoms deals worth $195bn have already been announced this year - well above last year's pace, which reached a total of $220bn.

US leads the way

The US telecoms market has been shaken up by the aggressive move by the largest long-distance company, AT&T, to regain its dominant position.

In the l980s, AT&T was broken up by court order into seven regional telephone companies (Baby Bells) charged with providing local services, with AT&T remaining only as a long-distance operator facing new competitors like MCI and Sprint.

But now those regulatory boundaries are breaking down.

The Baby Bells have gone through their own merger wave, with three giant companies emerging. They are now pressing to provide high speed Internet and long distance services, in return for agreeing to open their local markets to competition.

Last week Bell Atlantic gained the first regulatory approval as a long distance operator.

Now AT&T is fighting back, spending $120bn to buy up local cable television companies in order to build up a fibre-optic cable network that can bypass the regional companies. The new broadband cable system would provide television, video-on-demand, telephone services and high-speed Internet access direct to the home for a flat fee.

The new WorldCom group will need to make a similar investment in new technology, such as broadband and the next generation of mobile phones, which will also have Internet capability.

International alliances

A second force for change in the telecoms industry is the struggle to develop a set of global alliances, linking the newly deregulated state telephone companies in Europe to their US and Asian counterparts.

BT, the first deregulated telephone company in Europe, failed to make a breakthrough into the US when its plan to merge with MCI was scuppered by WorldCom. But is has now succeeded in building up a global business alliance with AT&T, which has now been extended to wireless communications.

Vodafone, the UK leader in mobile phones, has aggressively moved to establish its worldwide position, acquiring Airtouch on the west coast of the United States and creating a national US mobile network in a deal with Bell Atlantic.

That made the acquisition of Sprint's mobile phone network - the only other national system besides AT&T - even more important to WorldCom.

In Europe, the rival global alliance of Sprint, Deutsche Telekom and France Telecom has been thrown into disarray. The German and French state telephone companies had already fallen out over DT's failed plans to merge with Telecom Italia, itself the victim of a takeover by its much smaller rival, Olivetti.

Deutsche Telekom now faces intense competition on its home ground as the German market is opened up to full competition.

It has already acquired the UK mobile phone operator One-2-One, but its hopes of expanding into the United States has been at least temporarily blocked.

But with deregulation across Europe due to intensify, the global wave of telecoms mergers can only intensify.

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