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This Merger Is Looking Less and Less Likely

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What seemed a done deal last spring seems more and more like a dead deal this fall. When AT&T (NYSE: T  ) signed an agreement with Deutsche Telekom in March to buy its T-Mobile USA division for $39 billion, there was nary a peep from naysayers. Even Verizon (NYSE: VZ  ) COO Lowell McAdam said: "The AT&T merger with T-Mobile is kind of like gravity. It had to occur."

But now, the Financial Times reports, a majority of analysts rate the odds that the merger will go through at less than even money. Some even give it only a 1-in-5 chance of survival.

Twixt cup and lip
So what has happened to create such a change of opinion?

  • As to be expected, AT&T rival Sprint Nextel (NYSE: S  ) -- said to have desired T-Mobile for itself – started the snowball down the hill. It claimed that the much larger company formed by the merger would create an anticompetitive situation. It warned of a duopoly made up of AT&T and that other wireless giant, Verizon, which would then control 77% of the wireless industry's revenue.
  • Attorneys general in several states took notice and started investigations into the alleged anticompetitive effect of the merger.
  • Consumers also began registering their unease about a reduction in the number of wireless carriers and peppered the Federal Communications Commission with concerns about potential rate increases.
  • In July, Herb Kohl (D-Wis.), chairman of the Senate Antitrust Subcommittee, sent a letter to the FCC and the Department of Justice stating that "this acquisition ... would be contrary to antitrust law ... [and] should be blocked by your agencies."
  • At the end of August, the Department of Justice sued in federal court to stop the merger, saying that it would violate antitrust laws.
  • Two weeks after that, Sprint also sued to stop the deal from going through.

Fighting back
But AT&T hasn't been sitting still just watching its proposed deal getting hammered. It has brought the full weight of its prodigious lobbying squad to bear on Capitol Hill, and it's touting the job-building power of the merger with full-page newspaper ads.

Sprint also had a limited setback (or victory, depending on your point of view) in its lawsuit against AT&T. The judge threw out all but one aspect of its case: the ability to pursue the argument that smaller carriers with less clout would be put at a disadvantage in competing for the most wanted mobile devices.

What this means
If the deal doesn't go through, then AT&T is obligated to pay Deutsche Telekom a separation fee of $3 billion in cash and an additional $3 billion-plus worth of wireless spectrum and other assets. That's not a bad door prize for Deutsche Telekom if all falls through, but what, then, would it do with T-Mobile? Perhaps it'll end up selling it to Sprint.

AT&T looks down, but it's not out yet. Keep track of these companies by placing them on the Fool's My Watchlist:

Fool contributor Dan Radovsky owns 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 (5) | Recommend This Article (3)

Comments from our Foolish Readers

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 November 22, 2011, at 9:56 PM, conradsands wrote:

    Consumers are finally noticing that AT&T and Verizon = The Most Expensive Wireless Plans in America. We know where Verizon and AT&T (both in the top 5 for corporate lobbying) 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. This is how AT&T and Verizon fashion themselves as brilliant … with their political use of money.

    Taking into account the whole U.S. market, a combination of AT&T and T-Mobile would increase the Herfindahl-Hirschman Index (HHI), a widely 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 beware of how things could “mysteriously” turn in this case.

    “It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.”

  • Report this Comment On November 22, 2011, at 9:57 PM, conradsands wrote:

    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 November 22, 2011, at 9:57 PM, conradsands wrote:

    According to the report “Corporate Taxpayers & Corporate Tax Dodgers 2008-10,” two of the 25 companies with the largest total tax subsidies were AT&T at #2 ($14.5 billion) and Verizon at #3 ($12.3 billion). Also, there were 30 corporations that paid less than nothing in aggregate federal income taxes over the same period. These 30 companies, whose pretax U.S. profits totaled $160 billion over the three years, included Verizon. The report states the laws that allow this were not enacted in a vacuum, but rather were adopted in response to relentless corporate lobbying, threats and campaign support.

  • Report this Comment On November 22, 2011, at 9:59 PM, conradsands wrote:

    Following AT&T's logic, just give all wireless spectrum to one or two carriers and you can be sure their customers will have improved capacity and coverage. Sorry, that kind of argument doesn't cut it when a market already has a duopoly in place. Then, to say you'll bring back 5,000 overseas call center jobs that never should have been there in the first place so the deal will go through, is enough to make any American puke.

  • Report this Comment On November 23, 2011, at 7:58 AM, cedricjrwork wrote:

    Sprint has no one but themselves to blame for being left in distant 3rd place. Former senior managers were a bunch of good old boys held over from the good old days.

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