American Telephone and Telegraph Company, and T-Mobile Merger - Research Paper Example

? 7th December AT&T T-Mobile merger The current stiff competition in the business arena calls for adequate strategies by organizations in order to remain competitive. Some of the key aspects that companies have adopted in order to expand their market power are mergers and acquisitions. One of the most notable mergers that have recently been announced involves AT&T and T-Mobile companies. AT&T is an American based telecommunication company that provides mobile telephony and data services (Kleinfield 13). On the other hand, T-Mobile is a German based firm with subsidiaries in Europe and US. The merger, which was announced in March 2011, aims at expanding the financial soundness of the companies by increasing total sales. This paper evaluates the issues that surround the merger of the two companies. In order to evaluate the implications of the merger between the two companies, the paper will analyze the perspectives of the AT&T Company as well as the views of the government and the competitors. Telecommunication Market The US telecommunication industry is growing at a faster rate due to the high demand of the speedy services and broadband. The industry has been oligopolized by the consolidation of the telecommunication companies especially in 1990s. In order to acquire market power, telecommunication companies in US have emulated merger and acquisition resulting to a competitive edge in the local and international markets. Major mergers include Bell Atlantic and GTE in 2000, Cingular and AT&T Wireless in 2004 as well Nextel and Sprint merger of 2005. One of the major aspects that have resulted to the success of the telecommunication industry is that it is capital intensive. For example, in 2006-2009, more that $100 billion was invested in the industry by various companies. As a result, there has been a tremendous increase in the number of cell sites. Major players in the US telecommunication market include. Verizon, Sprint Nextel, AT&T and T-Mobile. Other major causes of the expansion of the US telecommunication market is globalization, search for economies of scale as well an increase of customer’s demand of 4G networks. The section below discusses the perspective of AT&T on the costs and benefits related to its merger with T-Mobile. Costs and benefits of the merger from AT&T perspective One of the benefits of the merger based on AT&T perspective is that it will create 5,000 new call centers in the US market. In this way, the company depicts that the level of household income will increase as a result of creation of more employment opportunities. In order to indicate that the merger will increase services and reduce prices within the US telecommunication market, the company provided an economic model to the Federal Communications Commission (James 2). AT&T Company aims at displacing Verizon Company in the market. According to the company top level management team, the merger will reduce the congestion experienced in its network. In addition, AT&T argues that the merger will result to the economies of scale. This will be achieved since the company is a large entity and its average cost will be reduced. Other aspects of economies of scale that will emerge include technical and financial economies (Carol 46). In this regard, the profitability of the company will be greatly enhanced since the costs of production will be allocated among many units. In order to ensure growth of the telecommunication market in US, the company management depicts that a significant portion of revenue that will be generated which is estimated to be more than $70 billion, will be allocated to innovation. The improvement of the telecommunication technologies will not only lead to effective communication within the US but also it will generate employment opportunities and foster US economic growth (Berkowitz 25). Additionally, the merger will enable the company to face off international competitors. This will ensure that consumers enjoy quality services with low costs. As a result of the announcement of the merger by Randall Stephenson, the AT&T Chief Executive Officer, the US Department of Justice took a legal action in order to block the merger (Chilton, 18). In its effort to fight the litigation in the court, AT&T will incur high costs. Regardless of whether or not the merger will occur, AT&T will incur the litigation and other related costs. Another cost of the merger will be incurred during the shifting of T-mobile users to 3G frequency (James 16). This will not only cause an increase in the company’s operation costs but also it will affect the T-Mobile users who will be required to buy new phones. According to AT&T, the merger will ensure stronger network and as a result, the company will appropriately serve the increasing number of cell phone users in US. The expansion of AT&T coverage as well as the strong network will ensure that the number of dropped calls is reduced. In addition, the company argues that the merger will improve data traffic in the future an aspect that will benefit its customers (Carol 36). Costs and benefits of the merger from the competitor’s perspective Competitors of the AT&T are opposed to the merger based on various factors. According to the Verizon Company, such a merger will result to a duopoly market structure. This will eventually lead to higher prices especially if the firms can avoid Nash Equilibrium. This is an equilibrium that is reached when a firm assumes that in response to its price reduction the other firm will not change its prices. Other competitors claim that if the merger occurs, AT&T and Verizon will ultimately control the market resulting to high prices. In the same way, the competitors argue that the merger will leave the consumers with few options since other firms will not afford to enter the industry based on the expansive market segment of AT&T and Verizon (The Economist 15). As a result, new products will not be available in the market leading to an innovative market. According to Sprint Nextel, another main competitor of AT&T, the merger would ultimately reduce the level of competition in the US telecommunication industry. It is imperative to note that lack of competition is one of the major aspects that demotivate firms from product diversification. In addition, lack of competition due to the merger will reduce the willingness of the companies to undertake innovation thus resulting to low quality of services. The competitors speculate that T-Mobile subscribers will experience an increase in the costs of their phones as well as high prices of the data plans. Costs and benefits of the merger from the government perspective AT&T and T-Mobile merger has faced stiff resistance not only from the competitors but also from the government authorities. As mentioned earlier, the department of justice has already emulated legal action in its effort to stop the merger. According to the government, the merger would violate antitrust law thus resulting to low competition. In addition, the government argues that the low competition will ultimately result to high prices, fewer products and poor services. Although the merger has been supported by governors from various states such Georgia, Michigan, Alabama, North Dakota among others, it still face disapproval from various state regulatory agencies (Sara 45). Senate Judiciary Subcommittee has also initiated various sessions where it has questioned the Chief Executive Officers of the two companies on the effects of the merger on the consumers as well as on the competition. The government depicts that T-Mobile customers will be disadvantaged in terms of high prices and breaking of the contracts between the T-Mobile and its subscribers. According to the AT&T, T-Mobile users will have to purchase new phones in order to be compatible with the technology adopted by AT&T (Dexter 21). Based on this; the government seeks to block the deal so as to protect the T-Mobile users from incurring extra costs that is avoidable if the merger does not occur. The case that is being taken by the District Court in Columbia is filed as U.S.v AT&T Inc., 11-01560 (Chilton 2). Evaluation From the different views of the competitors, the government and the AT&T, it is clear that the merger is faced with a lot of challenges that need to be effectively addressed. This is imperative in order to protect customers from exploitation as well as to enhance expansion of the US telecommunication industry. The merger which is valued at $39 billion will serve a total of 140 million subscribers who include 101 million AT&T Inc customers and 39 million subscribers from T-Mobile Company. To the AT&T, it is beneficial since it will result to an increase on the total sales and profits. Based on the fact that AT&T already has the market power over the mobile wireless devices, the increase of its customer base will ultimately reduce the sales of other companies. Similarly, the merger does not consider the plight of the customers who have played a vital role of using AT&T products and services leading to its profitability. If the merger does not occur because of a break-up, AT&T will pay a fee amounting to $7 billion (The Economist 23). Even though the merger is aimed at improving the services and increasing the shareholders returns, the high break-up cost will significantly affect the AT&T profit and loss in case the merger breaks-up. According to the AT&T, by purchasing T-Mobile the company revenue will increase leading to allocation of more financial resources for the innovation purposes. Based on the negativities that affected global economy as a result of the recent economic downturn, it is clear that the creation of more job opportunities as depicted by the company will greatly improve the household income in US. The reduction of competition and emergence of duopoly is one of the major arguments put forward by the AT&T competitors. It is essential to note that in the contemporary world where advancement of technology has positively affected economic performance of many countries, it is vital for companies to emulate product diversification and innovation. Product diversification and branding are imperative tools used by companies in order to put at bay their competitors. This means that lack of competition in the US telecommunication industry will reduce the chances of product diversification thus leading to poor services and reduced rate of technology development in US (Steve 19). The merger between AT&T and T-Mobile is focused at expanding the market share of the former an aspect that AT&T argues will enhance communication in United States. This is an indication that even though the merger is experiencing critics from various groups and the government, it is an important avenue of improving communication between individuals especially during business transactions. In addition, the company hopes to enhance its data traffic, thus improving customer relations. However, all strategies will require large capital investment thus resulting to large cash outflow in the company. Conclusion Based on the above discussion, it is clear that adequate consideration on the repercussion of a merger is an important aspect that companies cannot overlook. In the case of merger between AT&T and T-Mobile, there are quite a number of negative implications on the welfare of the customers and the competitors. Even though the decision to merge is mostly the role of management, shareholders should be given adequate information concerning the merger. In addition, it is vital for the governments to intervene especially when a merger between large companies such AT&T and T-Mobile is being contemplated. It is vital to note that the Federal government has played an important role in the AT&T merge. The costs associated with the AT&T and T-Mobile merge outweighs the benefits. The major aspects that will increase the total costs of the merger include the costs of establishing new 5000 calling centers, $4 billion that is already paid by AT&T to initiate the merger, costs of buying new mobile phones by T-Mobile users in order to be compatible with the AT&T technology as well as the litigation fees. In addition, the merger will lead to high calling prices that will negatively affect the consumers. On the side of the competitors, they will not have the financial ability to compete with the merged companies thus resulting to low level of innovation in the US telecommunication market. The introduction of 4G network after the merger will enhance the communication within and outside US. In addition, the merger will ensure that the two companies effectively compete with other telecommunication companies in the international market. Taking into consideration the total costs of the merger and the benefits associated with the merger, it is clear that the merger will not generate net benefits. Works Cited An Audacious Merger with a Poor Reception. The Economist, 2011. Berkowitz, B. The Heritage Foundation at 35, Media Transparency, 2008. Carol, W. AT&T deal offers economics lesson. New York: Evansville Courier & Press, 2008. Chilton, T. U.S. Files Antitrust Suit to Stop AT&T, T-Mobile Merger. http://signalnews.com/files-antitrust-suit-stop-att-tmobile-merger. Retrieved on December1, 2011. Dexter, T. RCA Opposes AT&T/T-Mobile Merger. New York: Global Insight, 2011. James, G. AT&T and T-Mobile: Good Deal, Bad Process. http://www.heritage.org/research/reports/2011/05/att-acquisition-of-tmobile-good-deal-bad-regulatory-process. Retrieved December1, 2011. Kleinfield, S. The biggest company on earth: a profile of AT&T. New York: Holt, Rinehart, and Winston, 1981. Sara, J.T-Mobile, AT&T merger to draw torrent of opposition. New York: Macmillan Publishers. Steve, A. T-Mobile users fear rate increase. New York: Macmillan Publishers, 2011. Tripped at the Altar. The Economist, 2011. Read More