AT&T-Mobile Scares Me

You'd have to live under a very dense rock in order to have missed the news: AT&T (NYSE: T  ) wants to merge with Deutsche Telekom division T-Mobile USA, and the feelings are mutual.

Deutsche Telekom has been shopping around its American operations for some time, so a deal isn't surprising at all. Sprint Nextel (NYSE: S  ) has been the most popular buyer around the rumor mill, as unlikely as that combination looks on paper. What's shocking here is that the prospective partners actually believe the deal will pass regulatory muster.

This looks easy!
At a glance, AT&T makes perfect sense as a T-Mobile partner:

  • Both networks operate under the GSM standard, so knitting their assets together should be a cinch.
  • Though T-Mobile hasn't formally announced plans to build an LTE-based 4G network, it has all the radio spectrum licenses needed to go there -- or to flesh out AT&T's own spectrum portfolio.
  • T-Mobile is the fourth-largest network in the USA and appears to be stuck there short of striking a major deal like this one.
  • Tacking on nearly 34 million T-Mobile subscribers gives AT&T an instant leg up on Verizon (NYSE: VZ  ) in the never-ending two-horse race for mobile superiority.

… or maybe not.
It's that last point that'll cause problems when the Federal Communications Commission and other regulatory bodies come a-knocking. If Oracle (Nasdaq: ORCL  ) had to spend the better part of a year convincing just the antitrust folks that buying Sun Microsystems wouldn't create an undue threat to competition, this deal should be like swallowing a watermelon in a single gulp.

Oracle and Sun worked in largely separate industries with very little overlap between them. AT&T and T-Mobile USA are direct competitors in a single, very well-defined market. Moreover, the price tag is five times larger this time, and you're looking at a fusion between two of the top four providers of a high-profile consumer service.

Maybe it's unfair to judge AT&T's chances against the Sun sale, but we're looking at a magnified version of the same regulatory dynamics. The FCC had recently warned about decreasing competition in the wireless market before news about a buyout that will leave AT&T and Verizon controlling a combined 80% of the U.S. mobile market.

The ostrich strategy
You can bet that AT&T and the Germans are very aware of these roadblocks. AT&T CEO Randall Stephenson spent a large chunk of the deal-announcement conference call deflecting these concerns and finally grew reluctant to discuss the matter any further.

The mobile market is already highly concentrated after several rounds of consolidation. The AT&T Mobility you know and probably don't love today is the product of several old mergers and joint ventures; Sprint obviously bought Nextel to form Sprint Nextel; Verizon snapped up minor threat Alltel; and there's a lot of action going on among regional players as we speak.

The damage done
There's no way the Feds would allow the market to coalesce into another monolithic Ma Bell, but we might get close. If this deal is approved, Verizon would be forced to either join forces with Sprint Nextel or contemplate its own wide-ranging shopping spree. If you take U.S. Cellular (NYSE: USM  ) and MetroPCS (NYSE: PCS  ) off the table, large batches of mobile subscribers become hard to find, making a Verizon-Sprint hookup the more likely and less complicated option.

And then you'd have the AT&T-Mobile giant facing off against the Verizon Nextel monster, leaving consumers with reduced choices and the mobile market with a serious concentration of power. AT&T notes that most regions in the U.S. have five or more mobile providers available today, so competition shouldn't be a problem. After the proposed T-Mobile merger and the likely Verizon retort, you'd be down to three in many cases.

Like Alltel before it, T-Mobile has often been a thorn in the major networks' collective sides as it introduced market-changing initiatives, such as the "MyFaves" shortlist of free-calling contacts. I can't say that Verizon has become more consumer-friendly since gobbling up Alltel, and T-Mobile likely wouldn't magically transform AT&T either. In short, consumers lose if this scenario plays out as presented. The Feds may take a jaundiced view of that fact.

What's next?
The next few months will be very interesting, if not downright entertaining. Expect both legal and emotional arguments for and against the merger, including colorful TV ads designed to sway public opinion and give flavor to the dry regulatory process. The deal will look nigh-on guaranteed at times and dead like an over-flogged horse at others.

I don't know which side will win out. The one thing that's for sure is that consumers will lose, and investors in anything telecom-related are taking part in a huge gamble right now. It'll be weeks and maybe months before we know which way this dramatic event is leaning, and until then I'm loath to touch any of the service providers with my hard-earned investable cash. The risks are simply too high.

Adding them to my watchlist is another matter, as it's not only perfectly safe but also the best way to stay on top of the situation. Get started right now:

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (11) | Recommend This Article (26)

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  • Report this Comment On March 21, 2011, at 2:02 PM, hbofbyu wrote:

    If Comcast can merge with AT&T Broadband and create the monopoly they did (where I live, there is no alternative to Comcast) then what is to keep this from happening. I would say it's a done deal. The politicians have already been "consulted".

  • Report this Comment On March 21, 2011, at 2:17 PM, awallejr wrote:

    You said it in a nutshell it is really a 2 horse race (that is why I own both). Telephone companies really are utilities, and I'd rather have 2 good ones than 10 bad ones.

  • Report this Comment On March 21, 2011, at 2:18 PM, TheDumbMoney wrote:

    The only thing this article doesn't really analyze is the impact of this on T shareholders.... Given that T is currently up about the same amount that the broader market is up, there does not seem to be a ton of downside risk in holding T shares right now, at least insofar as this deal is concerned. There hasn't been a huge pop that is going to go away if the deal is not approved. If the deal is approved, the most likely beneficiaries are shareholders in T. If anything though, the market may be signaling it doesn't like this as a deal for T, which would contradict a lot of what is being said. Why might that be? Well, maybe the market doesn't like the debt, or maybe the market doesn't like that T is paying in part with its shares, which may be undervalued, or maybe the market doesn't like that T is potentially simply overpaying for a business that to all appearances is worth a lot less than T is paying. Or given the stock price, maybe the market is saying this doesn't really change much. Before this deal happened, when was the last time anybody compared that T is doing to what T-Mobile was doing? No, the strategy commentary has been and will be about VZ vs. T, with the others largely irrelevant. That does not really change. Just not buying the idea that T-Mobile's exit from the market fundamentally changes the way T can act, not with VZ still around. That is one of the reasons I suspect the regulators will approve of this. The downside, if the merger is not approved, is mostly in Deutsch Telekom, whose shares last I checked were up more than 10% on the news, likely in my view because for one reason or another T is paying more than fair value in order to be able to ascend to the #1 position by buying the carrier it makes sense for it to buy.

  • Report this Comment On March 21, 2011, at 2:18 PM, lctycoon wrote:

    So if this deal goes through, then Verizon Nextel would control what? 140 million subscribers or so?

    The entire workforce in the USA is 150 million. That would be interesting...

  • Report this Comment On March 21, 2011, at 2:21 PM, lctycoon wrote:

    If this goes through and is approved, that really throws the door open.

    I wonder if AT&T Verizon Mobile will carry the iPhone...

  • Report this Comment On March 21, 2011, at 2:36 PM, mikecart1 wrote:

    Like I said in 2009,

    Like I said in 2010,

    Like I say in 2011,... Sprint is the best Buy out of all these.

    Sprint > VZ + T + T-Mobile

    ...when we are talking about stocks.

    Disclaimer: VZ customer. S shareholder. T hater.

    :)

  • Report this Comment On March 21, 2011, at 2:57 PM, HedgeFundLIVE wrote:

    a few things everyone should know about AT&T's proposed acquisition of T-Mobile http://bit.ly/ih0YVn

  • Report this Comment On March 21, 2011, at 3:09 PM, Borbality wrote:

    S could be a good buy after the 15% dip today.

    T shares are looking (at the moment) like MSFT. Nothing will move that thing up!!

  • Report this Comment On March 21, 2011, at 4:38 PM, Merton123 wrote:

    We are moving into a global economy. Competition must be viewed from a global perspective not a national perspective. From a global perspective do we have as concentrated control of the mobile markets?

  • Report this Comment On March 22, 2011, at 12:26 AM, WhidbeyIsland wrote:

    Airlines and cell phones, sure to crash?

  • Report this Comment On March 22, 2011, at 12:00 PM, stan8331 wrote:

    Drastically reducing competition in an already heavily consolidated industry can't help but be extremely bad for consumers. When for-profit companies have pricing power, they are going to use it.

    In the wake of the economic wreckage we experienced from allowing our financial industry to become over-consolidated, the idea of allowing our telecom companies to become too big to fail seems completely insane to me.

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