This week, AT&T (T: Charts, News, Offers), the second largest telecommunications company in America, announced its acquisition of fourth place rival T-Mobile for a whopping price tag of $39 billion. Customers of T-Mobile were not pleased with the takeover, fearing the data caps and price hikes that AT&T has been much criticized for. However, T-Mobile customers can relax for now, as the acquisition has many regulatory hurdles ahead, since the combined entity would overtake Verizon Wireless (VZ: Charts, News, Offers) as the largest telecommunications company in the United States. Shares of Verizon held steady, but third-place provider Sprint’s (S: Charts, News, Offers) shares crashed as analysts began to cut price targets as doubts were raised about the company’s ability to stay competitive with the Verizon and AT&T. If approved, what advantages would the new AT&T have over its industry peers in this increasingly cutthroat market?
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Combined, AT&T would have a customer base of 125 million, over 25% more than current market leader Verizon, which has 93 million. Sprint currently lags behind with 50 million, and is struggling with its money draining Nextel division and Clearwire (CLWR: Charts, News, Offers) investment. AT&T pulled out all the stops to acquire T-Mobile from its parent company Deutsche Telekom – as part of the $39 billion deal, AT&T has also granted Deutsche Telekom a seat on the company’s board of directors. The acquisition is seen as a strategic move, focused on rapidly increasing AT&T’s infrastructure across the country in preparation for its upcoming 4G networks, designed to outgun Verizon’s current LTE offerings. In addition, it will boost current network signals considerably across the country. Prior to the acquisition, AT&T had been spending billions to upgrade its existing network. Now, if the government allows the company to simply buy T-Mobile’s network, the task will be considerably simpler, cheaper and faster. Its cell coverage will increase by approximately 30% instantly. Like AT&T, T-Mobile also uses the GSM industry standard, unlike its CDMA-using rivals Sprint Nextel and Verizon. It’s also worth noting that Sprint learned this the hard way through its purchase of Nextel, which operated on a non-compatible proprietary network protocol iDEN, and spent years in debt due to the acquisition indigestion.
AT&T’s current strategy is an excellent move for the company which has been publicly lambasted for poor reception, and previously regarded as a “ball and chain” for previous generations of Apple’s (AAPL: Charts, News, Offers) best-selling, data-hungry iPhone. The iPhone and other smartphones caused the 8,000% spike in AT&T’s data traffic over the past four years, a pace which was impossible for any company to effectively meet. By 2015, the company forecasts that data usage will increase eight to times its 2010 figures. While the iPhone is no longer exclusive to the company, AT&T continues to not only offer the iPhone but a wide array of Android and Windows-based smartphones, which attract a wide variety of customers due to its tiered pricing system.
AT&T shareholders should keep a close eye on upcoming regulatory hearings. AT&T was once a monopoly which was split up by the federal government in 1984, and has since become a major lobbying force in Washington. The company’s PAC has contributed $46 million since 1989, with $3.6 million on federal candidates during the 2010 election. In 2010 alone, it spent $15 million lobbying. On Capitol Hill, the company clearly has its smaller rivals outgunned, and its massive merger will most likely get regulatory approval, though with some possible handicaps.
Shares of AT&T trade at a mere 11 times forward earnings with a hefty dividend yield of 6.1%. Telecom stocks have traditionally paid out higher dividends, mainly due to their perception as “mature companies” and income stocks. However, with this bold move, AT&T has a real chance to become a growth stock again by dominating the market and marginalizing its competitors.
Other News About T
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Did AT&T overpay for T-Mobile?
AT&T + T-Mobile: The Return of Ma Bell
What will the new AT&T look like after the merger?
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What can Verizon do to stay ahead of AT&T?
How does Google’s long-awaited OS fare?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
