AT&T's Failed Acquisition of T-Mobile USA
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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
Excerpts
A Note on the US Wireless Phone Market
The US wireless industry had been offering telephony services to corporate customers and consumers since the early 1980s. The automated systems that were essential for the wireless services included components such as wireless handsets, antennas and base stations for supporting the radio links to handsets, mobile switching centers, and backend systems for provisioning, customer service, and billing. The major role in the wireless industry was played by standards that facilitated the interoperation of these components...
The Seed for Unrest
In September 2008, the US suffered an economic collapse, which many considered to be the worst financial crisis since the Great Depression of 1929. Many economists and analysts were of the view that the root cause of the crisis was the collapse of the housing market, which later triggered the collapse of the banking system and financial institutions in the US. The US Senate Permanent Subcommittee on investigation into the origins of the 2008 financial crisis, pinpointed the cause as the high risk lending by US financial institutions, regulatory failures, and the high risk poor quality financial products designed and sold by investment banks...
About AT&T
The history of AT&T dates back to July 1877 when Alexander Graham Bell (Graham Bell) decided to invent a telephone for which he had earned patents in 1876 and 1877. On March 3, 1885, the American Telephone and Telegraph Company (AT&T) was incorporated as a wholly-owned subsidiary of American Bell with the objective of building and operating a long-distance telecommunications network in the US. The company grew over the next century to become one of the top telecom carriers...
About T-Mobile
Headquartered in Bellevue, Washington, T-Mobile was an American mobile network operator that offered messaging and data services, and wireless services in the US, Virgin Islands, and Puerto Rico. For the FY ended 2011, T-Mobile recorded revenues of US$ 20.61 billion. The history of T-Mobile dates back to 1994 when VoiceStream Wireless PCS, originally a subsidiary of Western Wireless Corporation (WWC), was set up. In 1999, WWC spun off VoiceStream Wireless PCS and set up a public independent company, VoiceStream Wireless Corporation. In 2001, VoiceStream Wireless Corporation was purchased by German telecom giant, Deutsche Telekom, for US$ 35 billion...
AT&T's Attempt to Acquire T-Mobile
While T-Mobile was criticized for its slower growth in the US wireless market, AT&T was often criticized for its inability to keep up with the growing mobile data usage. To fix its network woes, AT&T found a solution - acquisition of T-Mobile. On March 20, 2011, AT&T announced its plans to acquire T-Mobile for US$ 39 billion in a bid to increase network quality and ensure larger savings for the company. T-Mobile on its part, aimed to gain spectrum and network assets from AT&T to offer 4G Long Term Evolution (LTE) services to its customers in the US. The merger was expected to give AT&T a larger spectrum to work with. Also AT&T planned to bring LTE to former T-Mobile consumers...
Opposition to the Deal
While the synergies from the acquisition were expected to tackle the woes of AT&T and T-Mobile, the deal met with opposition from several quarters. Soon after the announcement of the acquisition was made in March 2011, Yankee Group conducted an analysis that revealed that the merger would offer better network coverage and high performance for consumers. Yankee Group used the Herfindahl-Hirschman Index (HHI) Index and found that "if the merger goes ahead 17 or 63 percent of the 27 markets would be highly concentrated...
The Response from AT&T and T-Mobile
In August 2011, AT&T and T-Mobile requested the DoJ to withdraw the antitrust suit and allow them to carry on with the deal. But the DoJ refused to change its decision and this prompted Deutsche Telekom to contest the suit. According to DoJ, "AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction's substantial adverse impact on competition and consumers. AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor."...
Deal Falls Through
AT&T announced that it had officially withdrawn its bid with T-Mobile in December 2011. Experts pointed out that the failed AT&T and T-Mobile deal would leave Deutsche Telekom in a precarious position. According to Philipp Humm (Humm), CEO of T-Mobile, the AT&T deal caused uncertainty for T-Mobile in terms of lost customers, lower customer service rating, and a deteriorating brand. He also said that the company had delayed several other lucrative projects by keeping them on hold when the merger with AT&T was being evaluated. It was reported that T-Mobile had held major negotiations with smartphone and tablet manufacturers like Apple in an attempt to avoid interference with any deals that were to take place between AT&T and those hardware vendors...
T-Mobile Precariously Placed
Some industry observers felt that the failed merger would limit T-Mobile's ability to lure customers from competitors. Some industry analysts raised doubts over the company's ability to remain competitive given its weak spectrum position and investment compared to its competitors. On the other hand, some experts felt that the spectrum T-Mobile would receive from AT&T could make it attractive for acquisition by any other wireless carrier in the US. However, Humm remained positive about T-Mobile’s outlook and said that the company would enhance its position in the US wireless phone market. Some analysts felt that T-Mobile may not be able to use the break fee to build a 4G network as Deutsche Telekom had to pay back a lot of debt. Critics felt that the break fee was not enough for it to compete with AT&T and Verizon who were making significant investments into their network deployment. Other carriers such as MetroPCS, US Cellular, and Leap Wireless were also planning to roll out their next generation service in their territory, while T-Mobile could not afford to be so widespread in its deployment...
Exhibits
Exhibit I: Timeline on AT&T
Exhibit II: AT&T's Five Year Financial Summary (in US$ millions except per share amounts)
Exhibit III: T-Mobile's Financials (in US$ millions)
Exhibit IV: Timeline of T-Mobile
Exhibit V: Subscribers of US Wireless Carriers (Q1 of 2012)
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