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What Will Verizon Do?

The deal announced this week between AT&T and T-Mobile has definitely gained some attention.  For one, it is putting the banking industry in focus, as J.P. Morgan prepares to lend out the biggest loan issued by a single bank for a take over ($20B).  On the darker side of the deal, many, including Sprint CEO Dan Hesse, have blasted the deal and accused AT&T of attempting to raise prices in the wireless industry without losing customers.  The deal, which is far from an approval, is getting compelling arguments from both sides of the coin.

Those that would have liked to get into T or Deutche Telekom before the deal but didn’t, have missed their opportunity.  But the aftermath of the announcement and the long regulatory and litigation process that T will be tied in is bound to more opportunities for profits.  One of these opportunities will come from how Verizon acts in the next few months.

Following the merger, Verizon will lose its hold as the largest wireless carrier in the United States, as AT&T will gain a 42% market share.  Verizon and AT&T-T-Mobile combined will effectively become a duopoly in the market, as Sprint will most likely become non existent if the status quo remains.  But the speculation comes in on the part of the status quo.  Will Verizon just sit back and enjoy the higher pricing power introduced by this deal while seeing AT&T zoom past it in terms of customer base, or will Verizon react to make life difficult for AT&T?

One thing to note in this deal is that T-Mobile definitely took advantage of the possibility of the merger not being approved.  If the merger falls through, AT&T owes T-Mobile a heft $3B as part of a breakup fee.  This might be more than enough incentive for Verizon to pursue actions in order to stop this deal, but I think any action from Verizon is more or less wishful thinking.

Probably the most effective method for Verizon to stop the deal would be to acquire Sprint.  An acquisition of Sprint would put regulators in a tough position.  They will either have to approve both deals, there by creating a de facto duopoly in the wireless market; or they will simply reject both deals, dealing AT&T with a $3B+ blow.  But the costs for Verizon to pursue such a merger are high.  If Verizon is to pursue this merger on the basis of breaking up the AT&T deal, it risks acquiring a company that it really may not want to acquire.  A Verizon, Sprint deal may not make the best sense for Verizon in a strategic sense.  Also, if Verizon does go ahead with the merger just for the possibility of it being broken up, it would have to put forth a deal that would equal at the bear minimum $20-25B.  Although Verizon would not expect the merger to go ahead, it would have to fork over millions of dollars in fees to investment banks processing the deal.

So the likely action for Verizon will be to do nothing.  It is probably best for Verizon to continue to focus on its corporate strategy, and step up its marketing efforts to bring in new customers from T-Mobile before the merger.  The regulatory battle for AT&T will be a long one, where it will face many litigation headaches.  This distraction proves to be in the benefit of Verizon in the short run.  I would not be surprised to see a significant increase in Verizon’s marketing expenses and customer base before the AT&T-T-Mobile deal closes.