Much to Mr. Market’s surprise and delight, a federal judge signed off on T-Mobile (TMUS) and Sprint’s merger plans on Tuesday. Sprint’s stock price rocketed 80% on the news. Probably no one is more thrilled than Softbank’s head, Masayoshi Son. He can now wiggle free of what has proved to be nothing less than an albatross about his neck, walking away with a gain on his $20bn investment in Sprint, compared with the prospect of losing it all plus potentially dealing with $39bn in debt if the deal wasn’t approved.
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Much to Mr. Market’s surprise and delight, a federal judge signed off on T-Mobile (TMUS) and Sprint’s (S) merger plans on Tuesday. Sprint’s stock price rocketed 80% on the news. Probably no one is more thrilled than Softbank’s head, Masayoshi Son. He can now wiggle free of what has proved to be nothing less than an albatross about his neck, walking away with a gain on his $20bn investment in Sprint, compared with the prospect of losing it all plus potentially dealing with $39bn in debt if the deal wasn’t approved.
Blue States Trying to Stop the T-Mobile/Sprint Merger
But not everyone is so happy. After the Justice Department and Federal Communications Commission approved the S/TMUS merger, about fifteen mostly blue states sued to stop the deal. The case was heard in December in New York City, and when we wrote on this topic two weeks ago, analysts and markets gave it a 50/50 chance of being approved.
A key reason for this ambivalence was fears that the judge, Victor Marrero (a President Clinton appointee) would overrule the government and buy the states’ arguments that the merger could adversely affect competition and lead to widespread job losses. Marrero was the judge in a recent high-profile case who ruled against President Trump’s suit to stop his accounting firm from turning over the president’s tax returns to New York State prosecutors in Manhattan. The case is under appeal.
So you might think Marrero is partisan. But looking more closely at his judicial record, he turns out to be a practical and apolitical judge who follows the law. In the Sprint/TMUS case, he ruled against the states’ argument that the merger violated anticompetitive provisions of Section 7 of the Sherman Antitrust Act because they only showed that it was possible rather than probable.
It’s easy enough to spin Marrero’s decision as vindication of the view that reducing four wireless carriers (now Verizon, AT&T, T-Mobile and Sprint) to three won’t be anticompetitive. That remains to be seen. Indeed, Marrero’s decision noted that neither wireless giants Verizon nor AT&T are ‘distinguished for innovation of beneficial customer services’, and they have frequently reacted to ‘innovations first made by T-Mobile or Sprint’. There is no guarantee the new T-Mobile will continue the gadfly role.
But even with those risks, the decision was the right one.
National Carriers Require Scale
If the merger were halted, the US wireless industry would effectively be two giants (Verizon and AT&T) and two pygmies (Sprint and TMUS), all trying to build out national networks. Common sense dictates that there is no way two pygmies could compete, especially when Sprint is financially weak and at risk of going bankrupt if it remains a stand-alone company.
The nut of the problem is a need for national carriers. In many industries (and certainly telecommunications) to be national requires scale. Small- and medium-sized businesses simply do not have the wherewithal to operate across the entire US.
Indeed, it is unlikely that a regional model for the telecom industry could work. We’ve been there. The government tried once to break up the national telecom industry back in 1982 when AT&T was split into seven regional baby Bells plus a stripped-down AT&T. For a variety of reasons, including regulatory forbearance but primarily economics, the eight combined and recombined and eventually became two.
If we want to have national industries and national telecom companies, there is little alternative to huge, oligopolistic companies. Given the role of technology and telecoms in our society we need players that have the scale to invest in and build out robust 5G networks.
To his credit, Judge Marrero recognized that.
The US Needs Updated Anti-trust Legislation
That isn’t to say creating huge, oligopolistic companies isn’t problematic. The heart of the issue is that current antitrust and monopoly law and case precedent is rooted in the world as it was in the 19th and much of the 20th century. It simply isn’t relevant in today’s world.
We can only hope that policymakers keep a close eye on how the telecom industry evolves under a three-company oligopoly and steps in with remedies if problems develop. In an ideal world, Congress would step in and update now century-old antitrust legislation to reflect today’s realities. We’ll have more to say on this issue in future Macro Hive features.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)