AT&T's Failed Acquisition of T-Mobile USA

Case Code: ECON038 Case Length: 18 Pages Period: 2011-2012 Pub Date: 2013 Teaching Note: Not Available

Price: Rs.500 Organization : AT&T, T-Mobile Industry : Telecom Countries : USA Themes: Competition, Mergers & Acquisitions

Abstract Case Intro 1 Excerpts

"Things would have looked pretty bleak in the U.S. wireless industry if AT&T/T-Mobile had gone through. It's taken a worry off not only us, but others."

-Dan Hesse, CEO, Sprint Nextel , in February 2012.

"The DoJ's recent actions increase Washington's influence on the fate of the industry and could force carriers to reassess and/or delay 4G strategies...In short, the DoJ lawsuit introduces a great deal of uncertainty into the telecom sector: uncertainty for AT&T and T-Mobile, uncertainty for their competitors who may reassess their strategies, and of course uncertainty for investors."

-A Morgan Stanley report commenting on Department of Justice's attempt at blocking the AT&T and T-Mobile merger, in September 2011.

Introduction

On December 19, 2011, Randall Stephenson (Stephenson), CEO of US-based telecommunications major, AT&T Inc. (AT&T) announced that the company had officially withdrawn its bid with T-Mobile USA Inc. (T-Mobile), a subsidiary of German telecom major, Deutsche Telekom AG (Deutsche Telekom), amidst heavy resistance from several levels of the US government and the US Congress . The deal, since its announcement in March 2011, had attracted opposition from several quarters. In August 2011, the Department of Justice (DoJ) first filed a suit to block the merger, terming the deal as anti-competitive.

This was followed by lawsuits by other major wireless carriers such as Sprint Nextel (Sprint) and Cellular South Inc. who feared that the deal would create a duopoly in the US wireless phone market dominated by AT&T and Verizon Wireless (Verizon). Subsequently, a report by the Federal Communications Commission (FCC) in November 2011 revealed that the deal would limit competition in every city in the US and lead to higher prices for consumers. The mounting pressure led to AT&T calling off the deal with T-Mobile in December 2011. AT&T was the second largest provider of fixed telephony and mobile telephony in the US, as of FY ended 2011. For the third quarter ended September 30, 2011, AT&T catered to 100. million subscribers in the US.

T-Mobile was founded in 1994 as VoiceStream Wireless PCS in the US. It was the fourth largest wireless carrier in the US with 33.7 million customers for the third quarter ended September 30, 2011.3 In its initial years, T-Mobile's growth was attributed to its post pay customers. Moreover, its wireless service quality and customer service helped the company emerge as one of the most promising players in the US wireless carrier industry. However, after the introduction of the iPhone in 2007, T-Mobile started losing customers to arch-rivals AT&T and Verizon who served iPhone customers. Over the years, the loss of subscribers translated into declining sales for the company. The company also struggled to add new customers while carriers such as AT&T, Verizon, and Sprint attracted new mobile phone shoppers with smartphones. These players also had faster networks and data services. To fix its problems, T-Mobile's parent company Deutsche Telekom decided to spin off the company or raise an initial public offering.

While T-Mobile was dealing with its woes in the US wireless phone industry, AT&T was often criticized for the slowness of its network despite its being one of the major players in the US wireless phone industry. Hence AT&T decided to improve its service and network quality with the acquisition of T-Mobile and its wireless spectrum. The move was also crucial for helping the carrier ramp up its rivalry with Verizon, according to AT&T. On the other hand, T-Mobile decided to use AT&T’s spectrum and network assets to cater to 4G customers in the US. Thus in March 2011, AT&T announced its US$ 39 billion cash and stock deal with T-Mobile.

The merger between the second largest wireless carrier in the US, AT&T, with the fourth largest, T-Mobile, was expected to create the largest wireless carrier in the US, according to experts. Soon after the deal was announced, it came in for a lot of flak from the DoJ, other wireless carriers, the FCC, and several consumer groups. The DoJ and Sprint said that the merger would restrict competition and increase prices for mobile phone users in the US. According to FCC officials, AT&T's confidential filings revealed that the merger would eliminate jobs in the US. The US regulators also questioned the effects the deal would have on the competitors and consumers. Interests groups such as Public Knowledge stated that the merger would cause "higher prices, fewer choices, [and] less innovation." Some groups felt that the industry would get consolidated, resulting in reduction in competition and job losses. However, AT&T and T-Mobile jointly denied that the deal would lessen competition. They said that it would, in fact, create jobs in the US. Both the companies also filed an application with the FCC requesting it to permit them to go ahead with the merger. AT&T and T-Mobile also lobbied the US regulators by getting support from several lobbying groups such as Alliance for Digital Equality, the Hispanic Federation, and the National Black Chamber of Commerce. Despite several attempts by AT&T and T-Mobile to carry on with the deal, the FCC announced that AT&T would have to withdraw the merger. Hence, in December 2011, AT&T announced that it had called off its merger with T-Mobile and would pay T-Mobile a break fee of US$ 4 billion following its withdrawal of the deal. Analysts were keen to see what the ramifications of the failed deal would be for AT&T, T-Mobile, and the industry as a whole.

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