Friday, November 25, 2011

AT&T, T-Mobile & Opportunity Cost

AT&T's acquisition of T-mobile is on the rocks, and it looks like things are going to get uglier before everything settles out.  As I mentioned in this CNN article, I'm convinced the deal is dead. My belief isn't driven by any particular dislike for this deal; in fact, I think it makes a lot of sense.  But it was a big gamble that regulatory approval would come through, and sometimes things don't work out.

The problem here is moving on crisply.  A major consolidating transaction is distracting enough; but trying to push one through the regulatory bog AT&T is facing?  The DOJ has sued to block the merger.  The FCC has referred the matter to an administrative hearing - a near-unheard of event.  AT&T has responded by taking its ball and going home, pulling back its transfer application in the hopes that it can refile once it works things out with DOJ.  All of this spells additional delay and uncertainty.  Neither AT&T or T-Mobile can move forward fully until the merger is resolved, one way or the other.  In the meantime, Verizon can keep taking market share steadfastly, not burdened down by distracting strategic considerations.

It's an object lesson in one of the dark sides of inorganic growth.  Yes, many mergers fail to deliver value.  But even those mergers that likely would work out can backfire if they take too long to consummate.  Company leadership may say all the right things about execution, but merger planning will consume resources and narrow strategic considerations for as long as the deal is pending.  Telecom mergers - with joint review via two separate federal agencies - are inherently time-consuming.  Combine that protracted merger with additional delay, a rapidly-changing industry and a tough competitor leading the market, and it's a recipe for disaster.  Doing a deal with T-mobile probably made all the sense in the world when AT&T drew it up a year ago.  But now that the knives have been drawn, and the best hopes for the merger have dimmed, AT&T must ask the hard question, and ask it soon:  does it continue to throw good money after bad?  For while AT&T is on the hook for a $4 billion breakup fee, there is a very real cost to letting pursuit of a merger prevent full-throated competition in the marketplace with Verizon.

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