The Department of Justice is taking a harder look at the proposed AT&T acquisition of T-Mobile. The deal could be delayed indefinitely while the investigation continues.
The combination of the two telecom giants would catapult AT&T into the number one slot in terms of market share with 39% of the market. Verizon would fall to second place with its 33% share. This is exactly the kind of issue that raises a red flag and why some people thought a 2011 closing was a bit optimistic, assuming the U.S. government allows it to go through at all.
Bloomberg is reporting that the Justice Department has sent civil investigative demands to the competitors of the companies, which would include Sprint, Verizon, and regional carriers. The exact details of the inquires are unknown though, as the review is confidential. A key area of focus would be how these other companies would be affected by the business deal.
Sprint has opposed the deal from day one. While it would still be in third place after the merger, it would be a distant third and the smallest of the remaining big three networks. Today T-Mobile holds the distinction of being the smallest of the big four.
An analyst at Credit Suisse Group AG identified the deal as the highest regulatory risk he'd ever seen. The Justice Department will go over this deal with a fine-tooth comb before effectively allowing a duopoly of AT&T and Verizon to exist.
This delay couldn't come at a worse time for T-Mobile. The carrier lost 99,000 post-paid subscribers in the first quarter of 2011, which tend to be the most profitable and most loyal, even though that loyalty is often helped by the threat of early termination fees. Its total subscriber base is now down to 33.6 million. Compare that to Verizon, which has about 102 million subscribers, and AT&T, which has around 96 million.
In addition to losing share in a growing market, its profit took a hit as well. It earned $362 million in the first quarter of 2010, but only $135 million in the same period this year.
The sooner the deal is finished for T-Mobile the better, even if the deal is blocked. When a company is potentially going to be swallowed up, there is uncertainty for both employees and consumers. All other things being equal, a consumer may leave or decide not to sign up with an acquisition target just because of the potential hassle when the transition begins. Existing talent is also more likely to leave given the right opportunity.
Neither of those issues are good for a company to have, and this delay by the DOJ just drags it out.