It almost seems as if the media has given up completely on the Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) merger because of regulatory reasons. Money isn't a problem as I have alluded to in previous articles that from purely a balance sheet standpoint and credit worthiness context, SoftBank (OTCPK:SFTBF) can secure the financing to pay for a buyout of T-Mobile. Furthermore, an Alpha Rich article on SoftBank that was recently released points out that SoftBank's various holdings of various companies (primarily Alibaba) aren't fully priced into SoftBank (which is traded on the Tokyo Stock Exchange).
Sprint a loser!?
While it's true that Sprint has become accustomed to being a loser according to Masayoshi Son (son is his last name). Masayoshi also knows that better motivation and spending more money on marketing could take the third mobile carrier only so far. That's because Sprint fights with economic constraints.
It would be far easier, for a consolidated entity to compete for the number three position and perhaps defer the consequences of being a marginalized competitor. Den Henderson a former Boston Consulting Group CEO had this to say about competitive markets:
Stable, competitive markets often have just three major competitors. Market share for these "Big Three" tend to align in a 4:2:1 ratio -- meaning that the industry leader will double the market share of its nearest competitor, which in turn does twice as much business as the next-to-nearest competitor. It's supposed to be a naturally occurring phenomenon of mature industries.
BCG believes that this assessment of stable competitive markets to be pretty accurate. How this fits into the various theories of competitive markets from the school of economics is up for debate (perfect competition, monopolistic competition, duopoly, oligopoly, and monopoly). However, Sprint does have a fairly strong argument for regulators as its network is falling behind Verizon (NYSE:VZ), and AT&T (NYSE:T). Perhaps acting out the part of a loser may actually help regulators to give the green light on the acquisition. Perhaps Masayoshi is showing this public display of anger to at least demonstrate that Sprint is in fact a loser without T-Mobile. Or, maybe I'm over exaggerating, because I doubt Mr. Son is angry as that would bring up images of an executive flipping over his desk, or throwing a phone across the conference room (perhaps my imagination is over the top as Masayoshi isn't Steve Jobs).
So how about the regulators?
It all comes back to whether or not the FCC and Department of Justice will allow the deal to happen. Remember, Verizon and AT&T won't want this merger to happen. As Michael Blair from Seeking Alpha alluded to earlier, Verizon is heavily exposed to prices following the buyout of its own stake from Vodafone Group (NASDAQ:VOD). And if Sprint and T-Mobile merge, the combined subscriber base of the two will force AT&T to price itself even lower as a higher number of subscribers will allow T-Mobile and Sprint to execute at better economies of scale. Verizon may lose customers or it will lower prices, either way, it makes it that much more difficult for Verizon to pay down $90 billion in debt.
I'm going to call it as it is. I'm not sure if the media has done its research on competitive practices, or if the DOJ and FCC are a little hesitant on the idea of combining the two companies because Verizon and AT&T are lobbying fairly aggressively against the proposed merger. Now before you criticize lobbying, it's a legal practice for companies as companies are encouraged to defend their own self-interest. I'm not going to get into the moral aspect of lobbying and the potential illegality of some who are going to abuse the political system. Also I'm not saying Verizon and AT&T are using illegal lobbying practices, as I'm sure Verizon and AT&T have high standards of legal and moral conduct.
Will Verizon and AT&T talk to politicians to keep this deal from happening? Sure they will. Will Sprint and SoftBank talk to politicians to allow the proposed merger to occur? Of course they will. To put this in perspective, Verizon spent approximately $13.44 million on lobbying expenditures in 2013, and may increase the amount of spending in 2014. AT&T on the other hand spent approximately $16 million on lobbying expenditures in 2013. Sprint spent the least on lobbying of the three at around $2.7 million.
With the next presidential election coming up in 2016, the pressure is on. The GOP hasn't had a president in office for quite a while. So I could only imagine political contributions to increase among these three companies. Personally, I think Sprint needs to step up the amount of cash it spends on lobbying, and do substantially more PR and marketing for why a Sprint and T-Mobile merger would be beneficial to the American public.
That way it won't have to re-experience the same fate AT&T experienced when it tried to takeover T-Mobile. Granted the T-Mobile and AT&T merger would have made it the biggest telecom in the United States whereas the T-Mobile and Sprint merger would keep it squared away at third place. Perhaps "leveling the playing field" would be the right way to express the difference between the T-Mobile and Sprint merger versus the one with AT&T, as it would only encourage competition and keep the United States telecom market from becoming far less competitive.
According to Reuters:
Federal Communications Commission Chairman Tom Wheeler expressed his skepticism about a potential merger between Sprint Corp and T-Mobile US Inc in a meeting with Sprint Chairman Masayoshi Son on Monday, according to an FCC official briefed on the matter.
Wheeler said he would keep an open mind about the potential transaction, according to the official, and generally echoed comments made last week by antitrust chief William Baer, who gave long odds to a regulatory approval of mergers between any two of the top four wireless phone companies.
The real key is that the FCC chief may keep an open mind, whereas the antitrust Chief may be opposed. However, we're talking about politics here. So things may change as we're only in the beginning stages of a potential M&A.
Currently the telecom market is an oligopoly and will remain one even if Sprint buys out T-Mobile. But if the T-Mobile and Sprint merger were not to occur there's the risk that the two leaders (AT&T and Verizon) could come further ahead and turn the market into more of a duopoly. Now in the world of economics, duopolies are considered to be worse than oligopolies as these companies tend to do better at profit maximization, and may in fact collude. Also, in a duopoly the incentive to compete is reduced significantly, and price discrimination increases.
Verizon and AT&T can charge higher prices for phone plans at the present moment, because there's better network reception and higher data speeds due to having a better network build out. Sprint has lower margins than AT&T and Verizon, which reduces Sprint's ability to build a larger and faster network. Smartphone technologies are expected to consistently improve, and with further competition amongst semiconductors on the back-end [Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM), Broadcom (BRCM)], the transition into a 5G standard should be expected by the mid part of the decade (after 2015). This could put the lights out on smaller competitors as network build-out of 4G LTE may not even be completed by Sprint and T-Mobile just as a new cutting edge standard of network technologies is introduced. This implies that Sprint and T-Mobile will fall further behind on the technological cycle of network buildout if current market conditions continue.
So if anything, Sprint needs to convince the American public and hold-off on face-to-face discussions with various regulators. If the American public becomes suspicious of "corruption" by our political representatives, following a massive public campaign for a merger, Sprint and T-Mobile may earn enough political currency to win the green light from both the FCC and DOJ.
Therefore, I still think there's a fairly decent chance of an approval. Between a natural occurring duopoly, and maintaining the status quo of the oligopoly, I think the oligopoly makes the most sense. I think regulators are being too cautious for their own good, as there's the risk of public outrage if in the event a merger of the two companies becomes anti-competitive rather than pro-competitive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.