AT&T to buy T-Mobile USA for $39 billion - is this good news or bad?

by Steve Ragan - Mar 21 2011, 03:00

AT&T announced plans on Sunday to purchase T-Mobile USA from Deutsche Telekom for $39 billion USD in cash and stock. Shortly after the news was announced, analysts, politicians, and other pundits offered their opinions. The big question is whether the deal will be approved.

AT&T, before the deal was unveiled, was the second largest wireless carrier in the United States. If approved, the merger with the nation's fourth largest wireless operator will shift AT&T into top spot with nearly 40 percent of the wireless market. Together, the two companies will boast more then 130 million customers.

In a letter to employees, T-Mobile USA’s CEO, Philipp Humm, said that the deal with AT&T “is the best possible solution for our business and for our customers.”

“I know this news is unexpected and may be somewhat unsettling, but I am confident that our strong culture and T-Mobile USA Values will help guide us through this process…” Humm said. 

“T-Mobile is a wonderful business, with great employees who have always demonstrated a willingness to do what it takes to be successful,” he added.

Most of the immediate backlash from pundits and consumers centered on customer service and performance. One of the real worries about the pending deal is that T-Mobile’s customer service, viewed as friendly and easy to work with, will suffer after AT&T completes the deal. Most of the support for those fears center on AT&T’s previous merger with Cingular, and the pain that was felt after the creation of Sprint-Nextel.

Price is another point. Nothing in the AT&T announcement explains what the new merger would mean for contracts and renewals. Will there be a price jump? Despite AT&T indicating not, only time will tell what happens to the carrier’s price plans. 

Some analysts called the proposed merger a huge risk for AT&T. For example, Jonathan Chaplin of Credit Suisse noted that the merger is an enormous regulatory risk for AT&T, but hedged his bets by adding that the telecoms giant would not have moved forward if it thought the deal would fail.

Meanwhile, Gartner’s Phillip Redman said the FTC and FCC would take a long look at the deal but, in the end, they are likely to approve it. In addition, Redman added that four providers were too many, so that the AT&T merger would be the last of its kind in the wireless industry.

Still, others see little benefit in the merger.

“Don’t believe the hype: There is nothing about having less competition that will benefit wireless consumers. And if regulators approve this deal, they will further cement duopoly control over the wireless market by AT&T and Verizon,” commented Free Press research director, S. Derek Turner.

“A market this concentrated - where the top four companies already control 90 percent of the business, and two of them want to merge - means nothing but higher prices and fewer choices, as the newly engorged AT&T and Verizon exert even more control over the wireless Internet. Before rushing to sign off on yet another mega-merger, the FCC and the Justice Department should confront the very real problems of runaway consolidation in the wireless market.”

Representative Edward J. Markey (D-Mass.), after hearing the news on Sunday, said he wants more information and plans to examine AT&T’s plans in detail.

“I intend to evaluate the proposed merger of AT&T and T-Mobile closely with a focus on how it would impact consumers, competition, and choice. While AT&T and T Mobile have determined that the merger is in their corporate interests, it must also be in the public interest. We should hold Congressional hearings to fully assess the effects of this proposed merger, and I look forward to actively participating in them with my colleagues,” Markey said.

Randall Stephenson, AT&T’s chairman and CEO, said in a statement that the merger would improve network quality and bring LTE (Long Term Evolution) to more than 294 million people. If the deal goes through, AT&T stressed that call quality as well as network density would improve.

“At closing, AT&T will immediately gain cell sites equivalent to what would have taken on average five years to build without the transaction, and double that in some markets,” the official statement said.

This makes sense given that both carriers share the same network designs, namely GSM. In Germany, the cash deal will provide investment in parent company Deutsche Telekom’s own fiber network, which is particularly important for its principal owner, the German government.

The price tag, $39 billion USD, will include a $25 billion USD payment in cash with the rest paid in stock. In exchange, Deutsche Telekom will receive eight percent ownership in AT&T and a seat on the board of directors. If Deutsche Telekom takes five percent ownership, AT&T will then boost the cash offering by an additional $4.2 billion USD.

While AT&T did mention the combined workforce of the two companies as a benefit of the deal, it did not comment on what would happen to retail stores and overlap within the workforce. This could mean some job losses once the merger is completed.

When it comes to actual offerings, T-Mobile has confirming to customers that there will be no iPhone on its network, but experts say this could change if the deal is approved and AT&T cherry picks certain devices. For now, T-Mobile customers should expect things to remain the same in that sense.

AT&T expects regulatory issues to be wrapped up in 12 months.

The official announcement can be read here.

What do you think of the deal? Let us know in the comments.

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