The proposed merger between AT&T and T-Mobile USA has encountered some major setbacks.  Federal regulators, driven by anti-trust concerns, are fighting diligently to prevent AT&T’s $39 billion merger with T-Mobile USA, which are currently the second and fourth biggest cell phone carriers, respectively.  Additionally, the companies face antitrust litigation from Sprint, the third biggest cell phone carrier.  As a result, some have put the probability of the deal closing as low as ten to twenty percent.

In a recent joint statement between AT&T and Deutsche Telekom (the parent of T-Mobile USA), the two cellular phone providers stated that they had withdrawn their application to the Federal Communications Commission to join their operations.  This action was taken shortly after the FCC’s Chairman, Julius Genachowski, indicated that the merger did not meet the FCC’s standard for approval.  Indeed, Genachowski is pursuing actions that would result in an FCC block of the deal.  Genachowski pursued the first step of such a block by sending other commissioners a proposed order to refer the case to an administrative law judge.  The FCC’s move to conduct a hearing marks the first time that the FCC has done so with respect to a merger since the 2002 proposed merger between Direct TV and Echostar, which was ultimately abandoned.

Moreover, while the companies have requested to withdraw their application, the FCC is not obligated to grant the withdrawal request.  The FCC may: (1) grant the request without prejudice, (2) grant the request with prejudice, which would prevent AT&T from later refilling and would essentially end the deal, or (3) deny the request and go ahead with its judicial hearing.

Despite this setback, the companies indicated that they would continue to pursue the merger and would prepare to challenge a federal antitrust lawsuit initiated by the Department of Justice.  The DOJ initiated the suit to enjoin the merger.  The companies’ withdrawal of their FCC application appears in part to be motivated by trial strategy.  The withdrawal may be an attempt to prevent the FCC from making the companies’ records about the potential effects about the deal public.  If public, such records could be used by the DOJ in the antitrust trial.  While the companies have stated publicly that their merger would create jobs and would not decrease competition, FCC officials have indicated that AT&T’s confidential filings suggest that the merger would eliminate jobs.  Thus, the filings may prove harmful to the companies’ case against the DOJ.

Furthermore, the U.S. District Court for the District of Columbia just issued an opinion in response to antitrust litigation initiated by the DOJ with respect to another merger that may prove harmful to the proposed merger between AT&T and T-Mobile USA.  In blocking a proposed merger between H&R Block (the second largest company in its industry) and a tax software company, the court held that “‘one of the largest companies in a competitive industry could not buy out a competitor, particularly when that competitor is seen as a maverick within that industry.’”  Unfortunately for AT&T and Deutsche Telekom, the antitrust case the DOJ initiated against them will be heard in the same district court.  Thus, the companies will likely be forced to confront this disadvantageous new precedent.

Even if the companies are able to win their case against the DOJ, AT&T must also receive the approval of the FCC in order to take over T-Mobile’s licenses, which are needed to operate its network.  Thus, the companies’ withdrawal of the FCC application is likely also a tacit acknowledgment that the deal is all but dead.  Tellingly, in their joint statement, the companies stated that AT&T planned to set aside $4 billion (which AT&T will use to pay potential breakup fees).  The $4 billion pretax accounting charge will be charged against AT&T’s earnings for the current quarter and represents a $3 billion cash payment and $1 billion in spectrum and roaming agreements.

The DOJ’s and FCC’s efforts to block the proposed merger suggests a re-invigoration of efforts to reign in excessive business practices on the federal level.  Such efforts come on the heels of an extended period of deregulation that preceded the financial crisis and may be an attempt by President Obama to make good on a campaign pledge to more closely scrutinize the antitrust concerns of proposed mergers.

Christina Santana

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4 Responses to Proposed FCC Hearing Suggests the Merger Between AT&T and T-Mobile is on Life Support

  1. ADM says:

    I think this is really an interesting issue. I am sure each one of us at some point has become frustrated with our cell provider and taken some solace in the fact that we can always switch to a competitor. From that perspective, it seems that consumers came out ahead when this merger failed. Eliminating T-Mobile, a provider known for its lower-cost options, would have left many consumers with the choice between AT&T and Verizon, which have both pursued a strategy of slowly and steadily wringing more profit out of each of their customers. However, it will be interesting to see how problems the merger was meant to solve, such as providing AT&T with the additional bandwidth it needs, are solved without the merger. Perhaps AT&T will solve this problem and achieve the bandwidth it needs by entering into network-sharing agreements, which are already in use in Europe. I’m sure AT&T’s tech-savvy and bandwidth-hungry users will be following this closely.

  2. Tom B. says:

    Great article. I find it interesting that AT&T and T-Mobile have been willing to continue its efforts at a merger. The 10-20% likelihood of success seems generous in my opinion. However, given the breakup fee it seems AT&T has a strong incentive to continue its fight. Also, the breakup fee AT&T has agreed to ($4 billion) seems excessive in light of the deal size ($39 billion). It will be interesting whether any cases are filed between AT&T and T-Mobile if the deal fails to close regarding the $4 billion break-up fee.

    The recent District court opinion and FCC dealings are just two more negative factors in a deal that already had a slim chance of success.

  3. Stephen Josey says:

    I’m interested to see how this pans out particularly with regards to the comment made by the D.D.C. regarding maverick competitors. T-Mobile is often considered the “outlier” within the Big Four wireless carriers, offering lower prices/more flexible payment plans and more innovative products (first to introduce 4g wireless). I could see this being a decisive point in the antitrust litigation – with the government really hinging its case on this argument.

  4. Alex Payne says:

    It also looks like AT&T is going ahead with its plans to develop a 4G LTE infrastructure – I think one of its greatest hopes was to at least get far enough forward to where it could coopt some of T-Mobile’s equipment; now they’re stuck playing catch-up to Sprint and Verizon. I wonder to what extent this more-or-less doomed from the start merger will actually result in setting AT&T back competitively.