Report: Government steps up oversight of carriers, vendors through merger-review process

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Through the reviews of mergers and acquisitions involving foreign-owned companies, the federal government has increasingly been exerting more control and oversight over carriers' networks and the vendors that supply them equipment, according to a Wall Street Journal report.

The report, citing unnamed sources familiar with the matter, said that the increased oversight is driven by heightened national security concerns within the government as well as concerns about network gear made in China and other foreign countries. That has led to an increasing number of "national security agreements" between companies and regulators, as the companies have agreed to added oversight as conditions of getting their mergers and acquisitions approved.

Most of the agreements have come about as a result of reviews by the Committee on Foreign Investment in the United States, an interagency body headed by the Treasury Department and charged with overseeing deals in which a foreign entity gains control of a U.S. company. Another group, informally called Team Telecom, is composed of officials from the Department of Homeland Security, the Department of Justice, including the FBI, and the Department of Defense, and also reviews such deals.

Three of the four Tier 1 carriers now fall under such agreements. Verizon Wireless (NYSE:VZ), which is 45-percent owned by U.K.-based Vodafone, has been under a security agreement since its inception in 2000. T-Mobile US (NYSE:TMUS) has been under an agreement since 2001, when Germany's Deutsche Telekom bought VoiceStream.

According to the Journal, the agreement that covered T-Mobile required that network gear be located in the United States and pass through a facility from which lawful electronic surveillance could be conducted. The DOJ and FBI were also given the ability to interview employees and look at "communications infrastructure" upon "reasonable notice" so that the agreement could be enforced. When T-Mobile and MetroPCS merged earlier this year, MetroPCS' network was folded into the agreement and the government was able to get a new condition that gave regulators 30 days' notice before the company uses a new vendor for network equipment. T-Mobile also agreed to resolve any security concerns the government raises relating to new vendors, according to the report.

The latest agreement involving a major carrier was Japanese operator SoftBank's acquisition of 78 percent of Sprint (NYSE:S), which said that U.S. agencies "will have the right to review and approve certain network equipment vendors and managed services providers of Sprint, as well as of Clearwire once Sprint completes its proposed acquisition of Clearwire."

The action was widely seen as a response to concerns that China would be able to use equipment from Huawei and ZTE to spy on Americans--ZTE and Huawei have vehemently denied those claims. Huawei supplies portions of Clearwire's WiMAX network. "We made a commitment that we will take Huawei out of the Clearwire network," Sprint CFO Joe Euteneuer told FierceWireless in July when explaining Sprint's plans to expand Clearwire's network nationwide. 

"Each agreement seems to become more restrictive as the government recognizes the benefits of access to networks and databases and as threats to national security increase," Warren Lavey, a former Skadden, Arps, Slate, Meagher & Flom partner, who worked on mergers reviewed by CFIUS, told the Journal.

Vendors are also covered by national security agreements, the report noted. Alcatel-Lucent (NASDAQ: ALU) came under review as part of the 2006 merger between France-based Alcatel and U.S.-based Lucent Technologies. Nokia Solutions and Networks inked an agreement in 2011 as part of its deal to buy of Motorola Solutions' networks business, and Ericsson (NASDAQ:ERIC) signed an agreement as part of its $1.13 billion purchase of Nortel Networks' wireless assets in 2009, an unnamed source told the Journal.

"The fact they have these rights to inspect gives them a window into equipment vendors that otherwise the government wouldn't have," Andrew Lipman, a partner at Bingham McCutchen who has worked on about three dozen agreements during the past 20 years, told the Journal. The government is using the agreements as a vehicle to "go to school" on network operations. "It's like a shadow foreman at the factory," he said.

For more:
- see this WSJ article (sub. req.)

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