AT&T/T-Mobile USA Merger on the Rocks?

Posted on Posted in Financial Blog

Yesterday, the U.S. Justice Department took its first step toward blocking AT&T’s takeover of T-Mobile USA by filing an antitrust lawsuit in federal court. ATT stock (NYSE: T) fell -4.6% Wednesday while T-Mobile’s parent company Deutsche Telekom AG (PINK: DTEGY) fell -8.1%. According to deputy attorney general James Cole, the proposed merger, which would have combined the second- and fourth-largest cellphone companies in the U.S., “would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services.”

For investors, this intervention by the DOJ is significant because it sets the tone for the Obama administration’s approach to mega-mergers. But before jumping to premature conclusions, consider the following points about the deal that may not have come across in news reports:

(1) The DOJ’s attempt to block the ATT/T-Mobile USA deal was not totally unexpected. A Wall Street Journal article from yesterday claims that internally the two firms projected the probability of the deal not clearing at around 25-35%. The DOJ lawsuit is a setback to both firms, and makes the merger less likely, but the two firms knew this was a possibility.

(2) The deal could still go through: the DOJ still must make a compelling argument in federal court as to why the proposed merger violates U.S. antitrust laws. It stands to reason that ATT will vigorously fight this lawsuit, as they have agreed to pay Deutsche Telekom $6 billion should the deal fall apart. Also, ATT and the DOJ could reach a settlement that allows the deal to go through, but with changes to the terms that were agreed upon 5 months ago.

With respect to mergers, it seems that the Obama administration is setting a precedent of favoring the interests of consumers over corporations and competition over consolidation. This is to be expected from a Democratic administration, as the party has historically sided with the interests of consumers, while Republicans tend to favor businesses interests. Whether one approach is more beneficial to society than the other is a thesis in itself, but given that we have a Democrat in the White House, this policy shift should not be a surprise.

Whether ATT will successfully acquire T-Mobile USA remains to be seen. If the merger falls through, Sprint (NYSE: S) may try to merge with T-Mobile USA, as they reportedly showed interest before the deal with ATT, and it is well-known that Deutsche Telekom has been seeking a buyer for their USA operations. On a side note, Sprint stock rose +4.2% yesterday, likely in reaction to the DOJ’s announcement.