International Telecommunications Mergers: U.S. National Security Threats Inherent in Foreign Government Ownership of Controlling Interests

U.S. regulators and Congress gave an increased level of scrutiny to recently approved international mergers involving a U.S. telecommunications firm merging with a company in which a foreign government owns a controlling interest. A foreign government that is friendly today has the potential to be an enemy of the U.S. tomorrow. Because of the strong dependence of business and national defense on telecommunications systems, a paramount concern for the U.S. should be to focus attention on the ownership of those systems because of the potential dangers inherent in the owners' ability to compromise or shut down our national communications network. The regulators ordinarily give attention to assessing the extent to which a proposed merger may violate antitrust guidelines by substantially lessening competition. However, the proposed acquisition of a U.S. telecommunications firm by a foreign company, in which its government has a controlling ownership interest, adds a national security dimension to the usual antitrust situation which may involve the intervention of the Federal Bureau of Investigation (FBI) and other federal bodies during the merger process. A serious national security threat can undermine or endanger the infrastructure of the U.S. telecommunications systems if the controlling shares of a pivotal telecommunications company are owned by an uncooperative or hostile foreign government. Recently there have been two international telecommunication company mergers involving U.S. companies and foreign firms with a government ownership interest in excess of the 25 percent limit established by statute for mergers with U.S. companies : 1) Deutsche Telkom (Bonn, Germany, an ex-state monopoly with a German government ownership voting interest of nearly 60 percent proposed a $55.7 billion acquisition of VoiceStream (Bellevue, WA) including a secondary acquisition of Powertel, Inc. in the summer of 2000 and 2) Nippon Telephone and Telegraph Communications (Tokyo), an ex-state monopoly with a Japanese government ownership interest of 53 percent proposed a $5.5 billion acquisition of Verio (Englewood, CO) in the spring of 2000. The NTT-Verio merger received final approval in September, 2000 and the Deutsche Telekom-VoiceStream merger received final approval in June, 2001. In varying degrees, the mergers and accompanying licensing issues have been challenged by the Department of Justice (DOJ or Justice Department), the Federal Communications Commission (FCC), the FBI, members of Congress and other U.S. government entities. The authors explain the special attributes of the general telecommunications business to emphasize its important role in the global community, discuss the national security issues arising when a company with a controlling interest owned by a foreign government is involved in a proposed international merger with an American company, review the deregulation of the telecommunications industry as a precursor to a rise in the number of international mergers, examine the legislative environment in which mergers involving foreign governments occur, and analyze two recent international merger transactions in which foreign governments own a controlling interest. The authors restrict their discussion to the safety net established to limit the extent of foreign government investment in a telecommunications company. However, it should be noted that, particularly in view of the ingenuity with which terrorists recently infiltrated the geographical boundaries of the U.S., the 25 percent ownership restrictions on telecommunication companies also apply to any corporation 1) owned of record or voted by aliens, their representatives, or 2) by any corporation organized under the laws of a foreign country, if the Commission finds that the public interest will be served by the refusal or revocation of said license. The same national security arguments discussed by the authors with regard to foreign governments are also applicable in the two listed situations involving foreign controlling interests in U.S. telecommunications systems.