Monday 3 October 2011

The Proposed Merger of ATT and T-Mobile

In "T-Mobile Antitrust Challenge Leaves AT&T With Little Recourse on Takeover," Bloomberg says
AT&T Inc. (T) wouldn’t have much luck trying to salvage its proposed $39 billion takeover of T-Mobile USA Inc. through negotiation with the U.S. Justice Department, leaving a court fight as its only recourse, lawyers said.

The combination of the country’s second- and fourth-largest wireless carriers would violate antitrust law and “substantially lessen competition,” the U.S. said in a lawsuit filed yesterday in federal court in Washington. The Justice Department asked U.S. District Judge Ellen Segal Huvelle to block the deal.

It would be strange for a merger of such large firms in a concentrated market to be permitted. What is most surprising is that ATT has agreed in its contract with T-Mobile, owned presently by Deutsche Telekom, to pay about $10 billion if the merger doesn't go through:

Rejection by regulators would leave AT&T liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network, a package valued at as much as $7 billion

21 comments:

  1. This comment has been removed by the author.

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  2. We recently discussed this in my G400 class and determined that there is much to be considered within the market for cellular service and wireless technologies.

    We concluded that it mirrors the Bertrand model much more closely than Cournot, and that this merger doesn't necessarily mean monopoly for the industry. However, given the stature of both of these companies, there is a great likelihood it may. It will be incredibly interesting to see how this suit plays out and the ramifications this could have on future mergers within the United States.

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  3. Didn't recently Cingular merge with another wireless phone provider? What makes that not against anti trust laws and this a violation?

    I feel like there are other industries that the government should be more worried about than the wireless phone services. Banking is becoming something like an oligopoly, and probably soon to be a monopoly.

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  4. I agree with Rebecca. This is far from a primary concern for the government. There are certainly more industries that the government should be more worried about than the merging of two communication services.

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  5. I think that there is significantly more to this than the competition. Moreover I think that the expenditures of these companies on lobbying is even more surprising. I am sure that the senators and congressman from the state of the headquarters of the company are doing all they can to get this through.

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  6. I'm extremely surprised at AT&T's agreement to pay T-Mobile nearly $10 billion if the proposed merger doesn't go through. This tells me either one of two things: (1) AT&T lawyers and managers are incompetent and did a terrible job at due diligence by completely overlooked the anti-trust aspect or (2) AT&T was overly confident that the merger would not encounter any anti-trust violations. Both are surprising to me and in my opinion reflect strongly upon poor management.

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  7. I can see the benefits from the merger. T Mobile does have the advantage of lower prices, so I can see that ATT would want to expand its market share. I don't understand, however, why there is a 10 billion dollar breakup fee. Either AT&T had some bad lawyers, or they know someone behind the scenes, where they are confident enough that the merger will go through.

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  8. I believe the $10 billion is an effort to facilitate tacit collusion in the event the agreement does not go through.

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  9. This argument is certainly very interesting and the result of this case could certain have a huge impact on future antitrust laws. As a current AT&T user, I think that the merger might not be a bad thing. The increase in cell phone towers that they would gain from T Mobile would probably result in better service for the customers.

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  10. I'm sorry to say I know little about US wireless industry. But I agree with Rebecca that banking industry is more worth worrying about. The IPO underwriting fee of major investment banks has been set to be 7% for long, which is obviously too high with respect to the underwriting cost and potential IPO underpricing. Besides, I'm curious about why the management of ATT failed to anticipate the DOJ's antitrust action and agreed to pay considerable breakup fee. They should have realized the huge losses of being blocked.

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  11. As the report by Bloomberg shows, most analysts have already lost faith in its approval.I am also astonished by the fact that AT&T promised a $10 billion breakup fee in case it didn't go through given so many people foreseeing it wouldn't. Maybe they too much took for granted that the government would be blinded by the employment benefit and service quality improvement they proposed.The telecommunication market in Hong Kong is very competitive and it's really easy for you to get a best offer from the multiple outlets standing next to each other on just one street. So when I first came here, I literally got a feeling that the telecom market has been monopolized by a few tycoons and the price is much higher, especially the two-way charging policy.

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  12. As mentioned above, I think that it is very interesting about the agreement that AT&T made prior to the deal. Did they have such confidence that they believed the justice department would not block the deal? Also, didn't something similar happen recently with an Internet browser, I believe yahoo? Where the justice department blocked a merger with them as well.
    With these two cases one would believe that the justice department is really cracking down on monopolies, yet isn't there a Debeers store now in Las Vegas and debeers is clearly a monopoly?

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  13. This case seems to have two parties taking unusual steps to reach a goal. As Nic said, the $10 billion repercussion of not getting the deal through is a little strange. Additionally however, the motives of the government seem a little cloudy. We might see them end up letting the merger go through, but at the cost of AT&T getting rid of some assets and bringing call centers back to the US. This lawsuit might end up having more effects on AT&T's business model then they originally planned. But the firm's actions tend to reflect that they value this merger more than people might think. I can see why they would want to reduce one more competitive threat.

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  14. The interesting aspect of the technology market and monopolies lies in the advantages to having such a monopoly. The more uniform technological services are, the more consumer friendly they are. However, in the long run, the lack of competition could slow the innovation in the market and lead to exorbitant prices. This merger is probably detrimental in the long run, but is not as detrimental as a normal oligopoly because uniform technologies have advantages.

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  16. I agree with Nic. I was trying to lay out the reasoning as to why in the world AT&T would contract to pay $10 million to Deutsche Telekom if the merger did not go through. I honestly don't see any hard evidence pointing out a simple reasoning for this. The only thing I can think of is AT&T wrongly guess that the government would overlook this monopoly case because of bigger economic problems. However; this is not the case-the government did pick up on this.

    I agree with Kyle. The government's motives are unclear because they actually do have worse problems to deal with but this could play to their advantage if there is an agreement between fed and AT&T to bring service/manuf. back to U.S. to help boost the economy.

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  17. As a customer, I think that merger of ATT and T-Mobile is a good thing because it can provide better services by increasing cell phone towers. If it really provides better services to customers, why is it violating anti-trust law? If it maximizes surplus, it shouldn't be considered as a monopoly. The government should focus on other business industries that is not maximizing surplus.

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  18. Rebecca is right that the Cingular-ATT merger in 2007 seemed as if it was too big to get approval but did. See http://www.networkworld.com/edge/news/2004/1025cingudojr.html . What happened there was that the Justice Department required ATT to spin off operations in the locations where Cingular and ATT were the two market leaders.

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  19. If the merger does fail, then T-Mobile will be worse off than originally because ATT will have learned a lot about its internal operations and plans. That might justify T-Mobile getting cash from ATT as compensation.

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  20. I think the cellular telephone market is important because cell phones have transitioned from a luxury to a necessity in the last decade, and we are all accustomed to having this ground breaking technology, and paying relatively little for it if we compare our plans to european cell phone costs. In this regard, it seems justified that the government be concerned with this merger. Moreover, most cellular phone clients have a contract; therefore, millions of t-mobile customers will all of a sudden be locked in as AT&T customers without having had a say in the decision.

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  21. This kind of merger creates a monopoly power, where two of the strongest firms merge reducing healthy competition in the market. It is important to see how the Herfindal index would change in this market. This kind of merger would be too big to pass in any situation where two of the largest direct competitors proceed to take over the market, making it impossible for smaller competition to survive or even consider entering

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