The largest proposed telecommunications merger is dead. Long live the big merger.

Though the $115 billion acquisition of Sprint–America’s No. 3 long distance company–by No. 2 WorldCom proved too problematic for antitrust regulators in the U.S. and in Europe, analysts expect the failed deal to kick off a new round of mega-mergers, continuing a long trend of consolidation in telecommunications. In their urgent quest for scale, network operators will remain on the hunt for partners to help fill the holes in their increasingly global strategy.

"Mergers and acquisitions will stay on a pretty good pace. I think we will eventually end up with a handful of top-tier U.S.-based companies dominating the market," says Michael Smith, lead telecommunications analyst at Stratecast Partners, a Philadelphia-based consulting and research firm that is part of San Jose’s Frost & Sullivan.

Sprint and WorldCom re-enter the merger market with the same wish list they had when they signed their original merger agreement nine months ago. WorldCom, by some accounts, walks away from the failed merger a stronger company having won over some of Sprint’s big-ticket multinational customers. And WorldCom CEO Bernie Ebbers, architect of some 70 acquisitions during the past decade, may feel somewhat deserving in the wake of his Sprint rebuff and plunge ahead with impunity, perhaps laying claim to BellSouth, the yet-to-be-spoken-for regional Bell telephone company. Sprint, meanwhile, in order to sustain its value as a takeover target, must quickly line up a new buyer. Possible suitors include the deep-pocketed Deutsche Telekom of Germany, or as some suggest, Qwest Communications, the No. 4 long distance company in the U.S.

Though neither Sprint nor WorldCom have called off the merger, industry watchers say this could just be a formality and the deal is likely to officially die this week. Sprint maintains it is still looking for a way to patch things together, which may merely display a good–faith effort aimed at deflecting a shareholders’ lawsuit, say observers.

The WorldCom-Sprint deal, however, may never have been fixable. Antitrust experts say that the merger would have reduced the U.S. long-distance industry to a two-competitor market from a three-competitor one–a factor that sparked a lawsuit by the U.S. Department of Justice and made the merger untenable. For European regulators, a major concern was the combination of the WorldCom and Sprint Internet operations. The proposed selloff of Sprint’s long distance operations and Internet backbone, while addressing the market-share problem, was far too impractical, says Charles Biggio, an antitrust lawyer with Akin Gump Strauss Hauer & Feld in New York and a former Justice Department official.

"The messages from the antitrust division seem to be saying, ‘Radical divestitures would split the company up in a way that is too risky,’" says Biggio. Whatever Sprint and WorldCom agree to sell, they would have to sell it in six months to a viable company that could compete on brand recognition and service quality. "That’s a pretty daunting task," Biggio says.

Several weeks of discussions between the companies and antitrust officials had produced few positive signs, according to people familiar with the negotiations. A major hitch in the talks was the fact that WorldCom’s Ebbers made it clear he would not part with his highly prized UUNet Internet division. That rigidity didn’t help the process. In fact, it probably served as one more reason for the Justice Department to pursue another agenda, says regulatory analyst Scott Cleland with the Precursor Group. "We knew the Department of Justice staff were listening to the companies because they wanted to flush out the companies’ best arguments. This usually serves as a way of previewing the court case. You’re basically hearing a mock trial of the other person’s arguments," says Cleland.

Although regulators on both sides of the Atlantic were clearly concerned about the WorldCom-Sprint merger, Wall Street misread the signals. The financial community is notoriously bullish on nearly all deals, and WorldCom-Sprint was no exception. But analysts may have put too much faith in Ebbers and ignored the signs coming out of Washington, says Cleland. It wasn’t until some rather unappetizing options were floated around that some company analysts started to sense the deal was faulty.

"Theoretically, every deal can get done, it’s just a matter of how many concessions need to be made," says Richard Klugman, a telecommunications analyst with Donaldson Lufkin Jenrette. "In this case, if WorldCom had to gut Sprint to acquire it, I’m not sure it would have been worth it."

So now it’s on to the next deal. With Qwest having closed its merger with Denver-based regional Bell US West last week (June 30) and GTE and Bell Atlantic officially together under the new name Verizon, the next stage of telecom courtship is ready to begin, and the field is wide open. "Literally every telecommunications company in the U.S. is in play right now, except SBC Communications and Bell Atlantic [Verizon]," says Stratecast’s Smith.

WorldCom staggers or swaggers, depending on how you view it, into this market still on the hunt for a national wireless network. Conventional wisdom puts Reston, Va.-based Nextel and Bellevue, Wa.-based Voicestream at the top of the list of desirable targets. But BellSouth, with its extensive domestic and international wireless properties and its local network, makes a compelling fit for WorldCom, say analysts. Even more attractive are BellSouth’s plans to lump its wireless operations together with those of SBC. If WorldCom could gain a stake in any or all of that configuration, it would have one of the largest wireless operations in the country, second only to Verizon’s. The overlap would be minimal and regulatory scrutiny far less discouraging.

Meanwhile, Sprint may be starting to speak in a few international tongues. Reports of Deutsche Telekom conducting talks with Sprint have been numerous and are unlikely to end soon.

The curtain is rising on the global stage of telecom mergers, says G. Anandalingam, who teaches information management at Wharton. "You’re beginning to see Deutsche Telekom and France Telecom coming into the picture and trying to buy US companies in order to sell services in the American market to expand their own scope," he says. "This will be the next wave of consolidation."