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The T-Mobile Merger That Should Have Been

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There's a controversial merger on the horizon that may spell doom for Sprint Nextel (NYSE: S  ) . You've probably heard about it: AT&T (NYSE: T  ) is acquiring T-Mobile from German phone company Deutsche Telekom. In a nutshell, this deal would push AT&T ahead of present subscriber king Verizon (NYSE: VZ  ) and leave Sprint Nextel a distant third. Sprint would be even more vulnerable to extinction, and its demise would leave only two major wireless carriers.

But things could have been different -- and nearly were.

A merger that would have made sense for a more competitive marketplace -- and certainly for Sprint's survival -- was so close to happening. As recently as early March, Sprint Nextel and Deutsche Telekom discussed having Sprint buy T-Mobile in exchange for Deutsche's getting, perhaps, a 50% share in the new company.

Deutsche Telekom relied on T-Mobile for about a quarter of its sales, but the future didn't look good. T-Mobile is falling behind AT&T and Verizon in customer growth and lagged rivals in building out its 3G network. Not getting the iPhone didn't help, either. So Deutsche's talks with Sprint came at a fortunate time for both companies.

The stumbling block, it turns out, was price. Estimates then placed T-Mobile's value at between $15 billion and $20 billion. But just a few weeks later, AT&T blew any such deal with Sprint Nextel out of the water. It made an offer Deutsche Telekom couldn't refuse: $39 billion. Sprint, with its market cap of just $16 billion and its heavy debt load of $18 billion, simply didn't have the resources to compete with AT&T. In addition, because of disparate network standards, any acquisition by Sprint would have caused far more taxing integration costs on the company. Sprint learned how difficult this process can be during its difficult merger with Nextel.

As it now stands, the FCC and the Justice Department's antitrust unit are both considering the AT&T–T-Mobile merger. If it does pass inspection, Sprint will have to pull quite a rabbit out of its hat just to keep hanging around. But while the deal is still pending, as fellow Fool Anders Bylund points out, Sprint is not standing still. It is undertaking an intense lobbying campaign and trying to get as many states as it can to investigate how the merger would hurt consumers.

So the fight is not yet over, but for a while -- before AT&T made its eleventh-hour deal-breaking offer -- Sprint Nextel could have been a contender.

Keep an eye on this corporate menage-a-trois by placing these stocks in your Watchlist.

Fool contributor Dan Radovsky owns shares in AT&T. Motley Fool newsletter services have recommended buying shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 18, 2011, at 6:52 PM, Gridlocked wrote:

    Sprint must be kicking itself for bargaining the price excessively.

    The move to LTE with all the combined spectrum would have made this much less painful than the Nextel deal.

  • Report this Comment On July 18, 2011, at 7:33 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon (the 10th leading U.S. lobbyist) and AT&T (the 12th leading U.S. lobbyist) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists to push the U.S. market into a wireless industry duopoly -- the American consumer.

    Taking into account the whole U.S. market, a combination of Dallas-based AT&T and T-Mobile will raise the Herfindahl-Hirschman Index (HHI), an accepted measure of market concentration, to 3,216 from 2,848, according to a Bloomberg analysis. Any score above 2,500 indicates a highly concentrated market, and any increase of more than 200 points clearly enhances market power, according to federal guidelines.

    If this ridiculous deal goes through, Sprint will be the only low-priced post-paid national wireless carrier left in the United States. T-Mobile customers are already fleeing to Sprint because they know they won’t get low prices from AT&T or Verizon. But AT&T and Verizon are two of the top corporate lobbyists in the country, so I'm sure the Feds are happy to oblige anything they want to do to secure a stranglehold on the market at the expense of the consumer.

    Here are reasons regulators should not approve the merger:

    - Pricing: Controlling approximately 80 percent of the market would give the Twin Bells significant, unchecked leverage to increase prices for consumers for voice and data.

    - Last Mile Access: Control of most of our nation’s vast wireline infrastructure and the critical “last mile” offers the duopolists the ability to raise competitors’ costs, reduce their network quality and quash competitive alternatives.

    - Choice: Next-generation smartphone and tablet manufacturers would be discouraged from partnering with any company other than AT&T or Verizon because of their massive scale, limiting choice to consumers and opportunity for manufacturers.

    - Innovation: Content and application developers would lack incentive to create content for companies other than the Twin Bells, diminishing innovation and harming developers as well as the capital markets that fund them.

    AT&T’s Dirty Money at Work …

    Snippets from CNN story …

    AT&T lobbyists push for T-Mobile deal

    For years, AT&T has been one of the biggest political and lobbying forces in Washington, D.C. Last year, it spent $15.3 million and had 93 lobbyists on its roster, including six former lawmakers. Germany's Deutsche Telekom spent $3 million on lobbying for T-Mobile USA in 2010, armed with 41 lobbyists and one former lawmaker.

    Many lawmakers have a personal interest in seeing AT&T do well. AT&T ranked as the sixth most popular investment among members of the House and Senate in 2009, the most recent year for which such data is available, according to the Center for Responsive Politics.

    And AT&T is considered a heavy hitter during campaign election cycles. In 2010, donors with links to the company made nearly $4 million in campaign contributions to candidates running for federal office.

  • Report this Comment On July 19, 2011, at 11:39 AM, henryg129 wrote:

    Sprint has "blown" it time after time because of their inability to pull the trigger and make a decision. Had they pulled the trigger on T-Mobile sooner they would not be in this position. Just look at their relationship with Clearwire....they refuse to make a decision one way or the other- whether to walk away or commit to a company which they already own 54% of.

    Now they are "crying" about the ATT - T-Mobile deal- There is no crying in big business. Sprint needs to rid themselves of the costly Nextel network and leverage their pricing advantage against Verizon and ATT. They should be focused on how to take market share away from VZW and ATT. Hell, Sprint had the opportunity to get the iPhone....but they turned it down- just one of the many bad decisions by the Sprint Executive team.

    Did any see the priceless look on Dan Hesse's face when ATT anounced the T-MO deal? I've never seen a CEO so dumb founded in my life. Hesse needs to GO!

  • Report this Comment On July 19, 2011, at 6:47 PM, SamS57 wrote:

    @conradsands Really well constructed and informative comment-thanks. I've been feeling smug with the thought that I'm safe with Tracfone's affordability, and wondering why people are sticking to the giants, who make you pay through your nose for the same service(and coverage) I have. Your "Last mile access" line opened my eyes to something I hadn't considered...their ability to raise competitors’ costs, reduce their network quality and squash competitive alternatives- especially considering Tracfone runs off AT&T and Verizon's networks. Now that would effect me! Not a pleasant thought.

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