Mergers & Acquisitions

Mergers & Acquisitions

December 19, 2011

AT&T Ends Bid to Acquire T-Mobile USA

Having already pulled its application to the Federal Communications Commission (FCC (News - Alert)) and placed on hold efforts to fight the U.S. Department of Justice (DoJ) lawsuit against its $39 billion acquisition of T-Mobile USA, AT&T capitulated today and announced the deal was kaput. AT&T (News - Alert) will now recognize a pretax accounting charge of $4 billion in the 4th quarter of 2011.

The AT&T corporate website carried the following item late this afternoon under the header: “AT&T Inc. (NYSE: T) said today that after a thorough review of options it has agreed with Deutsche Telekom AG (News - Alert) to end its bid to acquire T-Mobile USA, which began in March of this year.”

The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the U.S. wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.

“AT&T will continue to be aggressive in leading the mobile Internet revolution,” said Randall Stephenson, AT&T chairman and CEO. “Over the past four years we have invested more in our networks than any other U.S. company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well under way with our nationwide 4G LTE deployment.

“To meet the needs of our customers, we will continue to invest,” Stephenson said. “However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.

“The mobile Internet is a dynamic industry that can be a critical driver in restoring American economic growth and job creation, but only if companies are allowed to react quickly to customer needs and market forces,” Stephenson said.

To reflect the break-up considerations due Deutsche Telekom, AT&T will recognize a pretax accounting charge of $4 billion in the 4th quarter of 2011. Additionally, AT&T will enter a mutually beneficial roaming agreement with Deutsche Telekom.

 So ends the nine month long high wire act. Turned out there were too many questions and not enough factual answers to stem the growing tide of criticism that painted the deal as anti-competitive and not in the public interest. And so, too, ends all of the speculation about the various concessions AT&T might devise in order to gain policy-maker approval. In the end, there were none that made decent business sense.

As the Wall Street Journal article on the subject pointed out, “The move is a setback for AT&T Chief Executive Randall Stephenson, for whom the merger was the first big deal in his four years in the top job. It was a win for the Justice Department, whose antitrust team took an uncompromising position against the deal in August.”

What happens next?

Reality is that despite all of the speculation, nobody knows what happens next. AT&T still needs to build out a 4G network in the U.S., sooner rather than later, or risk significant churn. T-Mobile subscribers , given parent company , Deutsche Telekom AG’s consistently stated distaste for participating in the U.S. market face an uncertain future. The latter being true in regards not just as to where and to whom to pay bills but what devices they should be thinking about purchasing when their contracts expire. Taking advantage of the new roaming agreement between AT&T and T-Mobile almost seems like getting a lump of coal in your Christmas stocking.

AT&T’s statement makes it clear that it has 4G on the mind and will press ahead. According to filings with the FCC it will probably at a much reduced cost from the $39 billion T-Mobile USA would cost them, even taking into account the $4 billion breakup fee.    The vehicle will be as stated, e.g., the purchase of spectrum from other carriers and was not shy about its desire to have the government auction off more spectrum quickly.  

T-Mobile USA's network and 33.7 million customers may have to wait quite a while before getting some answers, and waiting in this case is not a good thing.   Speculation has always been that AT&T had placed too rich a premium on the acquisition and the likelihood for other buyers to surface at a price Deutche Telekom would find satisfactory is remote. This is especially true given indications that the most likely buyers in the cable TV business do not look to owning a wireless network as their path to greater profitability given the competitive nature of the U.S. cellular market, and the price that will need to be paid to keep up in an era where value is shifting from physical networks to apps and OTT providers, and leverage is in the hands of the likes of Apple and Google who really don’t need a network. 

The only real industry winner here is Sprint. Maybe Sprint Chairman Dan Hesse’s (News - Alert) bet on Apple going forward was not as crazy as everyone thought. To quote a famous poem, “Merry Christmas to all and to all a good night.”

Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya (News - Alert), Alcatel-Lucent, Telcordia, HP, Siemens, Nortel, France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Carrie Schmelkin

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