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AT&T Calls Off T-Mobile Deal

AT&T recognized that the winds from Washington were not blowing favorably.

Yesterday, while in the midst of doing something else, I noticed news flashing across my screen that the AT&T had withdrawn its offer of $39 billion for T-Mobile USA. This is very big news for a number of reasons.

1. It was a huge merger that would have left AT&T with 120 million customers.

2. It would arguably have been bad for consumers and good for shareholders.

a.) AT&T recognized that the winds blowing through Washington, from both the FCC and the Department of Justice (that monitors and regulates anti-trust issues), were not blowing favorably, given the size of the merger and its impact on the domestic wireless marketplace. According to the Washington Post, this transaction is the first to be "struck down" by the DoJ, although, in fairness, the DoJ only filed suit to prevent the merger.

b.) In fact, AT&T felt a chill in the air, and asked the court hearing the case brought by the DoJ to prevent the merger to hold off, suggesting that AT&T was getting its ducks in a row to withdraw the application and mitigate the damage (both literal and figurative).

In order to understand the significance of AT&T now withdrawing its offer, it's important to have a reasonable understanding of what was proposed. AT&T announced its intention to acquire privately held T-Mobile for $39 billion dollars on March 20, 2011. The deal attracted attention for a number of reasons.

First, while AT&T is a publicly-held company, T-Mobile is privately held by Deutsche Telekom AG, this allowing for some creative deal-making without the uber-scrutiny required when one publicly-traded firm devours another. Secondly, had the acquisition been approved, it is likely that consumer advocates were correct--there would have been less competition in the mobile space as one mid-size competitor was absorbed into a big one.

This was of particular concern to consumer advocates, because T-Mobile built its business on being price-competitive, thus forcing its larger rivals to hold prices down, at least minimally. Without T-Mobile, it's fair to assume that prices would have crept up at a more rapid pace than they already have.

On the spectrum side, the jewel that AT&T wanted is what's known as the AWS Spectrum in the 1700 MHz range. AT&T needed this to supplement its current spectrum holdings to support 4G (fourth generation), providing faster data rates for wireless broadband. In addition, by acquiring T-Mobile's spectrum (an asset that is clearly a limited commodity), AT&T hoped to combine T-Mobile's asset with its own, thus creating additional efficiency in the management of the spectrum that it has.

Finally, a deal like this is all about the real estate. More towers and more spectrum can mean better service. If the merger had been approved, it would not have been unreasonable to expect better access to a broadband wireless signal. It's just that even this selling point would not have been accomplished immediately. It's not unreasonable to assume this, because the transaction would have created additional consolidation in the wireless marketplace, and the Obama Administration has indicated a real interest in examining those transactions which it considers anti-competitive.

Because of AT&T's size and market position, not to mention the barrage of complaints that it has been hearing from the third-largest player in the room, Sprint, it is not surprising that the DOJ took its obligations seriously.

Sprint, along with consumer groups, claimed that the elimination of a mid-size player in the market would be bad for consumers. CEO Dan Hesse went so far as to say that he has "concerns that [the merger] would stifle innovation and too much power would be in the hands of two," claiming that if the deal was approved, AT&T and Verizon Wireless would control 79 percent of the market. Verizon Wireless, on the other hand, has remained surprisingly quiet about the acquisition, although I'm certain that there’s a party going on this week at Sprint's Kansas City-area headquarters that has little or nothing to do with the holiday season.

AT&T, which has been involved in high profile activities probably for as long as it has existed, is no stranger to the workings of Washington. In fact, in anticipation of something in the works, AT&T, at holiday season last year, attempted to curry favor with the FCC in a sweet and tempting way. Operation Cupcake (not kidding) deployed 1,500 cupcakes to the FCC's Washington office, with, according to the New York Times, military precision. Who doesn’t like cupcakes? Apparently the regulators, who were unwilling to turn a blind eye to what they viewed to be not in the country’s best interest.

In a parting shot at regulators for denying AT&T its merger, AT&T's CEO Randall Stephenson said the company would continue to invest in its own wireless network, and suggested that regulators should stay out of the way. Specifically, he indicated that American wireless customers "will be harmed and needed investment will be stifled by the regulators' decisions." While he may be right in the short term, to me, a company that focuses on its shareholders at the expense of its customers, is beyond short-sighted. Without a product that's worth owning, shareholder value is diminished, not enhanced.