What's the Deal with AT&T and T-Mobile?

Henry Truc  |

Reports of telecom giant AT&T's $39 billion takeover bid of German service provider T-Mobile helped to carry the market yesterday, but the deal is still the subject of much scrutiny from regulators and pundits. While lauded by most market experts (if approved) as a great deal for both companies, thoughts of the not-too-distant breakup of AT&T (NYSE: ATT) because of antitrust issues adds a bit of controversy. The merger of AT&T and T-Mobile--a subsidiary of Deutshe Telekom (Pink Sheets: DTAG)--would combine the second and fourth largest players in the wireless industry, surpassing Verizon--which was previously a spin-off of AT&T in 2000 as part of the divestiture.

While this means more dominance for AT&T, and a plus for its shareholders, it could also spark an acquisition binge in the telecom industry as other companies look to remain competitive. It could take up to a year before the FCC and Department of Justice approve the acquisition--assuming they do--but AT&T believes that that cost savings and revenue gains could be valued at $3 billion a year. In addition, there are almost 300 million wireless users in the U.S., the proposed acquisition would give AT&T 40 percent of that market, topping Verizon's 31 percent. But AT&T remains confident that though the deal will give it a significant market advantage, it isn't enough to require lawmakers to step in. Shocking.

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AT&T said that it would expand the rollout of its high- speed wireless technology, called Long-Term Evolution, or LTE, under the T-Mobile agreement. AT&T will offer the service to an additional 46.5 million people as part of the deal, helping achieve the Federal Communications Commission goal of making broadband available more widely, the company said.

“We studied this thing extensively over the last few months and we’re very confident it will be approved,” Randall Stephenson, AT&T chairman and chief executive officer, said in an interview. “Most local markets have a choice between five carriers, so the space will remain fiercely competitive.”

The same sentiment isn't shared by AT&T's competitors. Sprint NEXTEL CEO Dan Hesse expressed his concerns, stating that if the deal were allowed to go through, the top two players in the industry (AT&T and Verizon) would own almost 80 percent of market share. Sprint (NYSE: S), ironically, raised the same concerns in 2004 when it merged with NEXTEL. At the time, Sprint and NEXTEL were the third and fifth largest companies in the telecom industry.

Sprint isn't the only one to feel the sting if the deal goes through, though. Consumer advocates are already raising opposition and other industries are such to feel the pinch as cost savings for AT&T equals lower revenue for such companies like device makers, advertising companies, and even Google, whose Android smartphone was just starting to establish itself as a legitimate presence.

here were 296.3 million wireless subscribers in the U.S. at the end of 2010, according to estimates from researcher eMarketer. Adding AT&T and T-Mobile would give the combined companies 39 percent of the total, according to data from eMarketer and ComScore Inc., while Verizon Wireless has 31 percent.



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