10 August 2000
Source: US national newspaper, August 9, 2000, pp. A2-A14.

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U.S. Pushes to Resolve Debate on NTT-Verio

By NEIL KING JR. And DAVID S. CLOUD Staff Reporters

WASHINGTON -- Facing a Monday deadline, U.S. officials are scrambling to resolve national-security concerns that are holding up a $5.5 billion bid by the Japanese phone company, Nippon Telegraph & Telephone Corp., to acquire the U.S. Internet company Verio Inc.

Treasury Secretary Lawrence Summers has called a meeting for tomorrow of top administration officials to try to bridge deep differences among government agencies over the deal, which has been caught up in a national-security review process for nearly 75 days.

The Federal Bureau of Investigation, along with the Justice Department and the Pentagon, worries the deal could give the Japanese government-controlled company access to U.S. government wiretapping activity and could present an espionage risk. But other agencies charged with promoting trade contend the FBI has overblown the concerns, and they are pushing for less-stringent requirements.

The dispute has enormous ramifications, not just for trade relations between the U.S. and Japan, but also for law enforcement as it grapples with the complications of foreign investment in the rapidly growing U.S. Internet sector. This is the first time national- security reviews similar to those surrounding past aerospace and defense deals have been applied to an international Internet acquisition.

The FBI is insisting that NTT agree to binding commitments that would establish a firewall between NTT's Japanese executives and those U.S. employees involved in sensitive law-enforcement Investigations.

In particular, the FBI wants to impose a strict ban on Japanese government involvement in the company's day-to-day activities, according to a U.S. official familiar with the talks. The FBI also wants to bar disclosure of any classified or intercepted information to foreign governments. To handle wiretap requests, Verio, of Englewood, Colo., would have to set up a separate office that would be staffed only by U.S. citizens with security clearances.

Similar restrictions have been imposed recently on foreign telephone companies entering the U.S. market, but this would be the first time Internet communications would be covered. This deal has drawn heightened scrutiny in part because of the Japanese government's 53% stake in NTT ' although U.S. officials.contend that all future deals involving foreign government ownership will face similar hurdles and that Japan itself isn't the issue.

FBI misgivings over the NTT' deal caused the Committee on Foreign Investment in the U.S., an obscure multi-agency panel headed by the Treasury Department, to delay action on it. The panel, whose members include top cabinet officials, must recommend by Monday whether President Clinton should approve the deal.

U.S. officials had hoped the FBI could reach an agreement with NTT to resolve the national-security concerns. But now, with a deadline looming, other agencies led by Treasury are proposing the administration not push NTT too far.

"Treasury argues that there is no credible reason to believe that the Japanese government might take action to threaten U.S. national security. Th push a binding agreement would inhibit foreign investment and trade," the U.S. official said.

But other officials added that every U.S. agency involved in the talks wants to see the deal proceed and that their positions aren't ironclad. Impeding the deal, officials argue, would damage U.S.-Japanese trade relations and undercut years of efforts to remove barriers to cross-border telecom investments around the world.

Brett Lambert, an analyst with the Washington consulting firm DFI International, said that Mr. Summers "has been fairly direct with the participants that he would like to see this resolved and he would not like to be in a position to recommend a denial to the president."

Among those expected to attend tomorrow's meeting are Samuel Berger, White House national security adviser, and Attorney General Janet Reno.

What worries national-security officials is that without strict legal safeguards, they will have scant leverage over the company once NTT buys Verio. In theory, the U.S. could later move to void the acquisition, even without an agreement, if the company's actions threatened national security, although that is considered unlikely in such a high-profile deal.

NTT officials declined to comment on their talks with the government.

Investor anxiety over the negotiations has rocked Verio's share price. In 4 p.m. Nasdaq Stock Market trading, Verio fell $2.25 to $51.38, well below NTT's $60- per-share offer. In an effort to calm investor nerves, NTT and Verio released an unusual statement last week in which they reiterated that the transaction raised "no national- security concerns."

Verio is a top Web-hosting company for U.S. corporations, connecting more than a fifth of the companies in the Standard & Poor's 500-stock index to customers on the Internet. NTT has so far extended its tender offer for Verio four times, with the latest offer lapsing on Monday.