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A recent phenomenon in competition policy is the acquisition of a private firm by an enterprise that is either wholly owned by government or in the midst of privatization. Such an acquisition poses the question of how public ownership may alter the incentives of a firm to engage in anticompetitive conduct. It also prompts one to examine the process by which such altered incentives revert, as the level of government ownership declines, to the same incentives that face purely private firms. Using Deutsche Telekom's acquisition of VoiceStream Wireless as a case study, this article presents the economic questions relevant to evaluating the competitive consequences of acquisitions by partially privatized firms. It predicts gains or losses to various constituencies of producer groups. It then analyzes bond ratings and weighted-average costs of capital to determine whether such data are consistent with the hypothesis, advanced by parties opposed to such foreign investment, that partially privatized acquirers benefited from the government subsidization of their credit.

The announced acquisition in 2000 of the American wireless telecommunications firm VoiceStream Wireless by Deutsche Telekom AG of Germany presented the Federal Communications Commission (FCC) with the novel issue of whether the acquisition could harm US incumbent wireless carriers not because of greater competition, but because of potential anticompetitive behavior that is unique to a market entrant that has partial government ownership. In this paper, I examine two specific economic questions raised by Deutsche Telekom's acquisition of VoiceStream. First, does partial government ownership remove profit maximization as the carrier's objective and thereby increase the risk of predatory conduct? Second, does a telecommunications carrier that is undergoing privatization receive a capital subsidy from its national government, such that the carrier poses an unusual risk of predatory behavior in the US market after its acquisition of the US firm?

The FCC approved Deutsche Telekom's acquisition of VoiceStream in April 2001 and in the process answered both of these questions in the negative, at least with respect to Deutsche Telekom2 These same questions are likely to arise in the future, as other carriers undergoing privatization invest in or acquire US wireless carriers.

1. Predation, privatization, and profit maximization

It is a subtle economic question whether a firm having a government owner has different incentives from those of a wholly private firm. The scholarly literature in economics and law contains virtually no published analysis for this question. Professor David Sappington and I have analyzed the competitive incentives of government enterprises' Our analysis assumed, however, that the public enterprise was 100 percent owned and controlled by a government entity.

There is a fundamental difference between a company with domestic government ownership and a company with foreign government ownership. Plainly, the former is a greater threat to competition than is the latter. For example, predation and cross-subsidization by the US Postal Service in the American overnight mail or parcel delivery market is plausible, given that the Postal Service is 100 percent government-owned with no realistic prospect of privatization in the near future, enjoys a statutory monopoly over both the delivery of letters and access to the customer's letter box, and is subject to relatively light-handed regulation by the Postal Rate Commission.' The same is true of Deutsche Post and the German parcel delivery market, as the European Commission ruled in March 2001, when it found Deutsche Post to have engaged in predatory pricing in violation of Article 82 of the EC Treaty.6 If particular members of the US Congress seek to prevent possible competitive abuses by government-owned enterprises, there is much that can be done first by scrutinizing the businesses that the US government itself wholly owns and operates behind the protection of statutory monopolies and other privileges and immunities.

In contrast to the plausible anticompetitive behavior in domestic markets by public enterprises such as the US Postal Service or Deutsche Post (before its initial public offering), predation and cross-subsidization by Deutsche Telekom in the American market for wireless telecommunications services is highly implausible. A critical assumption of the cross-subsidy argument is that Deutsche Telekom would use cross-subsidies to obtain a temporary competitive advantage over its rivals in the US wireless market, with the objective of eliminating competitors. That view implies that Deutsche Telekom would engage in behavior resembling predatory pricing, which is said to occur when a firm incurs a loss with the intention of eliminating rivals and later raising prices to supracompetitive levels to recoup earnings after the rivals have exited the market.7 The published economics literature questions this argument and the Supreme Court of the United States has stated its view that predatory pricing is unlikely to succeed because (I) there is little guarantee of successful recoupment, (2) rivals can also incur losses in anticipation of future profits, and (3) new entrants will appear if prices are raised after the existing competitors have exited the industry.8 Moreover, it is difficult in practice to distinguish low competitive prices from predatory prices and to distinguish .low earnings from predatory losses.

The German government's partial ownership of Deutsche Telekom during the remaining period of the company's privatization does not increase the incentive for Deutsche Telekom to engage in predatory behavior in the US wireless telecommunications market. As Professor Sappington and I have emphasized, the absence of long-run profit maximization is the critical factor behind the theory that a public enterprise will have a heightened incentive for predatory conduct. But profit maximization necessarily becomes the objective of a firm as soon as it is at least partly privatized and listed on a stock exchange. (The same is not true of the US Postal Service, for example, which is wholly owned by the US government and thus has no shares publicly traded on a stock exchange. 10)

This insight has critical implications for the competitive analysis of the partial government ownership of Deutsche Telekom. That partial government ownership does not relieve Deutsche Telekom from the objective of profit maximization. Because Deutsche Telekom must compete with other firms for capital, Deutsche Telekom is not free to choose predatory prices (or any other prices) that do not maximize long-run profits, and hence returns to investors. In short, because Deutsche Telekom is a publicly traded company, it must seek to maximize profit.

It is a fundamental principle of corporate law that the major shareholder of a corporation owes a fiduciary duty of loyalty to minority shareholders.' 1 Even though Deutsche Telekom is a German corporation, its securities trade on not only the Frankfurt and London exchanges, but also the New York Stock Exchange. As of January 2001, nearly 20 percent of Deutsche Telekom's stock was held by US individual and institutional investors. If, as major shareholders of Deutsche Telekom, the German government and the Kreditanstalt fUr Wiederaufbau (the German reconstruction bank) attempted to influence the management of Deutsche Telekom to deviate from profit-maximizing behavior, and if Deutsche Telekom acquiesced to that attempt, Deutsche Telekom would expose itself to liability under American corporate law to the company's minority shareholders. Similar risk of liability could arise for Deutsche Telekom under the laws of other nations with respect to the rights of Deutsche Telekom shareholders in those nations.

Given the highly developed market for shareholder litigation in the United States, these various fiduciary duties are powerful incentives to keep the current majority shareholders of Deutsche Telekom inclined toward profit maximization. That legal duty aocords with good business sense. Deutsche Telekom is in the midst of privatization. Plainly, to ensure successful share offerings in the future, the Kreditanstalt fUr Wiederaufbau and the German finance ministry have a powerful incentive to see that Deutsche Telekom delivers maximum value to its current shareholders, which is an objective that cannot be reconciled with a strategy of incurring predatory losses in new markets.

2. The capital-subsidy hypothesis

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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