AT&T/T-Mobile: Three Key Realities Why Merger Gets Approved

In the end, the U.S. Government is highly-likely to approve the AT&T/T-Mobile merger, despite the significant opposition, because of three over-riding realities: 1) market/financial realities, 2)DOJ legal/precedent realities, and 3) FCC public-interest realities.

I.    Market Reality:

T-Mobile's leadership and owners have decided that they are unable and unwilling to invest what is necessary in order to compete going forward in the American 4G wireless market, and given that fundamental premise, the AT&T/T-Mobile merger is the optimal market outcome for T-Mobile's customers and for competition.

• T-Mobile shopped itself for a good while in order to fully test its market options and ultimately chose to merge with AT&T as the best outcome for all concerned from its perspective.

So the key baseline fact grounding the DOJ/FCC's decision processes here, is that T-Mobile's leaders/funders are effectively exiting this business one way or another long term via merger, sale or benign neglect.

• While the U.S. Government has the authority to approve or disapprove this transaction, it has no authority or power to force T-Mobile's German owners to invest the capital necessary to make T-Mobile a viable 4G competitor long-term.
• The cold financial reality here of the European Union's crushing debt crisis and Germany's de facto role as the EU banker of last resort, means there is no reasonable prospect that T-Mobile's German owners and investors will change their mind or find the very large amount of capital T-Mobile needs in order to build out to be a fourth 4G national infrastructure in the United States when they have so many overwhelming needs for German capital in Germany, and in the EU overall to support the solvency of Greece, Portugal, Spain, Italy, etc.
• What is also driving home the cold financial reality of market forces not being interested in building out a fourth national 4G infrastructure in the U.S. is that both new U.S. 4G infrastructure players,  Clearwire and LightSquared, are partnering with #3 Sprint to create a stronger #3 competitor based on innovative new technologies and business models.
• What is driving the U.S. wireless market to consolidate from 4 main national 3G competitors to 3 main national 4G competitors, is not the AT&T-T-Mobile merger, but the capital markets reality of a European debt crisis coupled with an anemic economy.

The other dimension of the market reality here is comparing the relative options available to T-Mobile.

• An independent T-Mobile may look appealing to some that have an unrealistic view of the market and financial realities discussed above, but the reality is that T-Mobile would be less and less competitive quickly over time without the necessary large capital investments in 4G infrastructure upgrades; and the longer the company went without necessary capital investments would mean T-Mobile rapidly would fall further and further behind competitively.
  • Simply, T-Mobile knows it needs to consolidate, in order to best serve the long-term interests of its customers, employees and shareholders.

If staying independent is not viable long term, then which partner is best for T-Mobile's customers, employees, and shareholders?

The overarching reason T-Mobile was not interested in being acquired by Sprint is the same reason Verizon logically was not interested in T-Mobile -- i.e. technology incompatibility.

• T-Mobile has the same GSM infrastructure technology as AT&T meaning that they are a company/network combination that is relatively easy, efficient, inexpensive, and quick to integrate and operate.
• Sprint(-Nextel) on the other hand is a living and walking example of the extreme risk, complexity and difficulty of trying to merge, integrate, and operate different Sprint and Nextel technologies, infrastructures, and networks.
  • Simply, T-Mobile is worth dramatically less to Sprint, Verizon, or anyone else because of the much higher relative cost and difficulty of technological integration and operation.
• T-Mobile combining with ClearWire or nascent LightSquared was also not a viable option for T-Mobile because those entities need massive capital at the same time that T-Mobile seeks to exit the U.S. market precisely because they do not have or want to supply the capital that these entities desperately need.

II.   DOJ:

Why the DOJ ultimately will not block the AT&T/T-Mobile merger (which at worst is a 4 to 3 consolidation and in many markets is a 6 to 5 or 5 to 4 consolidation), is that the DOJ knows that there is slim chance the courts would support a DOJ injunction to block the acquisition, because it would be viewed as capricious by the court based on the DOJ's very long history of precedents (several) in evaluating these wireless markets on a local (not national) market basis, and also given the DOJ's 2008 approval of the ostensible 2 to 1 XM-Sirius consolidation that has not proven anti-competitive three years later.

Moreover, given that the DOJ has a tried and true system of divestiture remedies that have worked in the past, and given that AT&T has signaled it would be amenable to divestitures in select potentially problematic markets in this merger, a DOJ attempt to block AT&T-T-Mobile in court would have a steep uphill argument to justify that the DOJ did not "move the goalposts" in the middle of the game, and act in an arbitrary and capricious way (given the facts of DOJ's previously-approved wireless mergers, T-Mobile's clear determination in exiting the market, and the fact that it was T-Mobile which reached out to AT&T to merge, not the other way around.)

Furthermore, this DOJ knows that the facts and precedents of this case make it a loser legally in court, if the DOJ were to somehow gamble and try to legally challenge this acquisition in Federal Court.

III.  FCC Reality:

This FCC has loudly and consistently declared that its highest priority is accelerating more and faster broadband to all Americans, when arguably the single decision the FCC could make to most quickly and effectively advance its top priority and broadband goals would be to approve the AT&T-T/Mobile merger.

Moreover, the Administration proposed a wireless broadband deployment initiative to reach 98% of Americans by ~2016 (that would require passage of new legislation and implementation of new government implicit subsidies), while this AT&T/T-Mobile merger would achieve virtually all of the President's goal, in a similar or faster timetable, with much greater likelihood of timely success, and without any need for Government legislation or subsidy.

Furthermore, it will be extremely difficult for the FCC, which claims to be supportive of the President's Executive Order to minimize government actions or regulations that would slow economic growth and hurt job creation, to regulate or effectively ban this merger's economic growth and job creation benefits.

• It is also hard to see how the FCC would be able to argue persuasively that blocking the merger would be good for the economy or jobs, when 26 Governors and the unions affected strongly support the merger.

The FCC reality is that they have already clearly defined this FCC's public interest standard to de facto be promoting accelerated broadband deployment in their National Broadband Plan and that the Administration has defined a new de facto public interest standard for independent regulatory agencies in his Executive Order:

• "Executive Order 13563 of January 18, 2011, "Improving Regulation and Regulatory Review," directed to executive agencies, was meant to produce a regulatory system that protects "public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation."  Independent regulatory agencies, no less than executive agencies, should promote that goal."

IV.   Conclusion

In sum, despite the false and unsupportable claims that this merger would create a duopoly, three key realities -- severe market capital constraints, favorable DOJ legal precedents, and new FCC/Administration de facto public interest standards -- all point to the AT&T/T-Mobile merger ultimately getting DOJ and FCC approval.