Battle for control of Sprint turns ugly

May 31, 2013: 9:54 AM ET

Softbank's bid for third-player in U.S. wireless has run into harsh criticism.

By Michael Fitzpatrick

To the finish line.

To the finish line.

FORTUNE -- With Japan's bid for Sprint, the U.S.'s third-place mobile carrier, coming under attack from patriots who consider the merger a security risk, the Japanese could be forgiven for thinking General Jack D. Ripper was on the loose again.

Readers might recall the commanding general of the fictional Burpelson Air Force Base, from Stanley Kubrick's coldwar masterpiece Doctor Strangelove. Ripper issued an order to the 34 B-52's of his Wing to bomb Russia and start WWIII. The cause of his disaffection? He could "no longer sit back and allow Communist infiltration, Communist indoctrination, Communist subversion, and the international Communist conspiracy to sap and impurify all of our precious bodily fluids."

Similarly, the objections raised against the Japanese-owned Softbank center on its alleged close relationship with China and all the potential snooping against America China has been accused of. (Nobody has mentioned impurifying bodily fluids -- yet.)

Softbank offered $20.1 billion for 70% of Sprint (S) last year, while the U.S.-based Dish (DISH) last month proffered $25.5 billion for all of the company. The rivalry has been fierce. The competing American bidder has made these cyberattack allegations the center of a last-minute campaign to discredit the Japanese pitch, which many analysts consider the stronger.

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What is on the minds of the ever-vigilant -- such as U.S. Senator Charles Schumer who, interestingly, employed a campaign fundraiser who is now working for Dish? The sapping of intelligence via Chinese-made networks or hardware Softbank might use. "I have real concerns that this deal, if approved, could make American industry and government agencies far more susceptible to cyberattacks from China and the People's Liberation Army," Schumer said a statement. "Softbank's Japanese wireless network reportedly relies heavily on Chinese equipment [manufacturers] with ties to the Chinese government."

All poppycock, says tech analyst in Tokyo, Gerhard Fasol of Eurotechnology. "I can't believe that Softbank has that interest at all; they are a Japanese business. Their top management is almost all Japanese; one board member is a U.S. Goldman-Sachs banker. Softbank uses mainly Ericsson equipment but some others also," he says.

Ironically it was a U.S. firm, Clearwire, a Sprint subsidiary, that installed Chinese Huawei equipment in its network that raised the alarm on a commie plot first. Softbank has agreed to rip it all out at a cost to itself of $1 billion.

Now the inter-agency Committee on Foreign Investment in the United States (CFIUS) has completed its own review of the risks from a national security standpoint according to Softbank spokesman Mitsuhiro Kurano, and the misgivings seem further Ripperesque. "We have received approval ... including participation by Department of Defense, the Department of Justice (including the FBI) and the Department of Homeland Security. All these agencies are fully satisfied that there are no national security issues that have not been fully and completely addressed," he says.

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As for the foreign ownership of U.S. telecommunications companies raising any sort of national security concern, analysts point out that two of the four largest U.S. telecoms are already owned by non-U.S. entities. (Verizon Wireless (VZ) is partially owned by Vodafone, a U.K. company, and Metro is owned by Deutsche Telekom, a German firm.) Having Sprint majority-controlled by the Japanese Softbank breaks no new ground. "It's just that all of the U.S.'s closest allies, Japan, the U.K., and Germany, will have a stake in this part of the U.S. market," says a source working on the Softbank merger who did not wish to be named.

Softbank now looks on track to obtain the remaining regulatory approvals for an expected close in early July 2013, making it the largest foreign investment in the U.S. since the recession of 2008 according to the firm. Should the merger go ahead it will be the largest cross-border deal out of Japan in history.

The promise by Softbank to relieve itself of any China-made technology and clear out the Huawei networks in the U.S. seems to have assuaged the security regulators. Which is just as well, says Asian security analyst at globalsecurity.org, John Pike. He says there is a real danger posed by any equipment made in China operating on foreign networks. "The Chinese government would be stupid to neglect using Chinese companies to gain clandestine access to U.S. information infrastructure," he says. "The concern here, as with other such cases, is that the intrusion would be too subtle to reliably catch, so it is much easier just to avoid the hazard altogether."

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