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T-Mobile Proves Regulators Were Right on AT&T Bid

By Alex Dumortier, CFA - Jan 8, 2014 at 6:00PM

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T-Mobile continues to make life difficult for AT&T and Verizon Wireless

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Better-than-expected additions to private payroll numbers and Federal Open Market Committee minutes that show the Federal Reserve plans to "proceed cautiously" in reducing the pace of its bond purchases -- neither of these were enough to raise the market's temperature today, as stocks ended Wednesday unchanged, with the the S&P 500 off by just two hundredths of a percentage point. The narrower Dow Jones Industrial Average (^DJI 1.27%) fell 0.4%.

Within the oligopoly of cellular carriers, T-Mobile (TMUS 1.98%) continues to play the iconoclast. Last Friday, AT&T (T 1.27%) announced that it will offer a credit worth up to $450 to get T-Mobile customers to switch carriers, but that move only pre-empted a widely anticipated offer from T-Mobile, which was announced today.

The termination fee-killer
Here are the details of T-Mobile's offer: In an aim to neutralize the termination fee as an obstacle to switching providers, the upstart carrier will offer new customers that incur such a fee from their old provider up to $350 per line and up to $300 in credit to trade in their old phone.

The offer is only available to customers of the top three carriers, AT&T, Sprint (T 1.27%) and Verizon Wireless. The shares of the three "targets" didn't react the same way to the news: AT&T and Verizon (VZ 0.83%) fell 2% and 1.6%, respectively, while Sprint rose 1.1%. (Note, however, that both AT&T and Verizon went ex-dividend on Wednesday, which would explain a significant portion of the price declines.)

Sprint is reported to be preparing a bid for T-Mobile -- perhaps the divergence indicates the market believes a tie-up is possible, or it could simply be that investors believe the two largest carriers stand to lose the most from T-Mobile's action. Naturally, T-Mobile isn't immune to competitive pressure -- last Friday's announcement from AT&T coincided with a 3.3% drop in its stock price.

While T-Mobile's combative approach may reduce aggregate industry profits, it's a boon for consumers (full disclosure: I'm a satisfied T-Mobile customer) and it justifies regulators' decision to quash AT&T's 2011 bid to acquire the company. Does anyone really believe the industry would be as competitive today if T-Mobile had been folded into AT&T? Furthermore, while it chips away at the profits of its larger rivals, T-Mobile is accruing long-term value for its shareholders by creating goodwill with its customers (old and new). If Sprint wants to get its hands on that value, expect T-Mobile to ask for a hefty acquisition premium -- assuming regulators don't step in first.

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. 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.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,761.05 (1.27%) $424.38
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.27 (1.27%) $0.23
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$146.46 (1.98%) $2.85
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$45.15 (0.83%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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