News Analysis
NEW YORK—As unfathomable as it sounds, T-Mobile USA could emerge a stronger competitor if its merger with AT&T Inc. falls through, after the U.S. Department of Justice (DOJ) moved to block the deal this week.
Wednesday’s lawsuit by the DOJ, which seeks to block AT&T’s proposed acquisition of smaller rival T-Mobile, assumes that T-Mobile is a strong and competitive player in the mobile industry. Its viability as an independent company “places important competitive pressure” on its larger rivals in the industry, the DOJ said in its complaint.
If the $39 billion deal falters, T-Mobile could conceivably emerge as a stronger competitor to the rest of the field, due to certain clauses AT&T and T-Mobile’s parent company—Deutsche Telekom AG—agreed in their contract.
Biggest Irony
If that happens, it will become the business sector’s biggest irony of the year. In AT&T’s quest to become the biggest wireless carrier—surpassing current leader Verizon Wireless—it ultimately helped to weaken itself in the process of failing to consummate the deal.
The merger agreement between the Dallas-based AT&T and T-Mobile’s German parent states that should a deal fall through, AT&T must pay $3 billion cash to Deustche as a breakup fee.
In addition to the cash, AT&T must also give T-Mobile airwave rights—or “spectrum” in industry lingo—which will help T-Mobile expand its network quality and bandwidth. But that’s not all: AT&T must also allow T-Mobile to use its network for roaming purposes, at a discount, which could broaden T-Mobile’s network footprint within the U.S.
All of the above, which analysts estimate to be worth $7 billion in total compensation to T-Mobile, could serve as catalysts in propelling the company, which is currently the smallest of the four major U.S. wireless carriers, to a more solid footing, and would stop the current trend of customers deserting the company. The four major players are Verizon Wireless, AT&T, Sprint, and T-Mobile.
T-Mobile currently is the most cost-competitive of the four major carriers, and faces stiff competition regionally from MetroPCS, an upstart carrier with generally low monthly service rates. T-Mobile has traditionally been one of the boldest carriers in terms of introducing new devices, with its innovative Sidekick smartphone, and it was the first U.S. carrier to introduce smartphones based on Google’s Android operating system.
But some analysts aren’t as convinced that even with $7 billion in benefits, T-Mobile would survive. They point to the fact that Deutsche Telekom has been reporting T-Mobile on its financial statements as assets held for sale, and the parent company has not been making the necessary investments into T-Mobile during the past year, since management no longer views it as a part of its future.
‘Higher Prices’
Sprint Corp. was a vocal critic of the proposed merger, arguing that the deal would limit innovation and drive up prices for consumers. The merger would leave the industry with two large carriers, with Sprint as a distant third. A stronger T-Mobile would give the industry two larger players, and two smaller, but financially viable, rivals.
The DOJ’s action was a surprise to AT&T, which had expected quick approval. The company went so far as to announce this week that it would bring up to 5,000 call-center jobs back to the U.S. with the completion of the proposed merger—perhaps as an added incentive for the DOJ to expedite its approval.
Of course, AT&T is seeking to challenge the DOJ’s assertions, and a merger could still be completed if AT&T successfully defends its position in court, or is willing to shed certain other assets to appease regulators. If the deal does falter, T-Mobile could continue as a separate wireless carrier in the U.S., or its German parent could prepare it to spin off as a separate company.
In a statement, AT&T General Counsel Wayne Watts said, “The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.” AT&T reiterated that the merger would improve wireless service and offer 4G network speeds for more Americans, and that it would add jobs. However, the company did not comment on whether consumers would see higher prices due to decreased competition.
T-Mobile’s parent, Deutsche Telekom, apparently also isn’t eager to keep it alive. Deutsche CEO Rene Obermann told reporters in Bonn, Germany, that his company would join AT&T in its legal fight to uphold the merger.
But not everyone was disappointed in DOJ’s lawsuit, with some consumer groups applauding the decision.
"The last thing beleaguered American consumers need right now is higher prices and shoddier cell phone service. That’s exactly what would happen if AT&T was permitted to buy T-Mobile," said Harvey Rosenfield, founder of Consumer Watchdog, a public-interest organization based in Washington.
