On April 29, 2018, Sprint and T-Mobile announced an agreement to merge the two companies. Though this is exciting news, we have been here before. On-and-off discussions between Sprint and T-Mobile have been ongoing for over four years. The most recent set of discussions took place in the fall of 2017. However, on November 4, 2017, they announced they had called off negotiations. ((Rachel Lerman, Collapse of T-Mobile-Sprint merger talks eases layoff worries, may spur more price cuts, The Seattle Times (Nov. 6, 2017), https://www.seattletimes.com/business/technology/collapse-of-t-mobile-sprint-merger-talks-eases-layoff-worries-may-spur-more-price-cuts/.)) Rumors indicate that the talks broke down because SoftBank (Sprint’s parent company) did not want to give up control of the combined entity. ((Pavel Alpeyev, SoftBank CEO defends ending Spring/T-Mobile merger talks, Chron (Nov. 6, 2017), https://www.chron.com/business/article/Masayoshi-Son-Defends-Ending-Sprint-Merger-Sees-12335175.php.)) Masayoshi Son (CEO of SoftBank Group Corp.) said, “basically, we didn’t think we should be agreeing to a deal that would result in a loss of control,” and that “having U.S. telecom infrastructure is essential and we need to keep control.” ((Id.))
There were also substantive negotiations in 2014 that resulted in an agreement. Unfortunately for the companies, the deal was abandoned in August 2014 because of opposition from federal regulators. ((Michael J. De La Merced, Sprint and SoftBank End Their Pursuit of a T-Mobile Merger, N.Y. Times (Aug, 5, 2014), https://dealbook.nytimes.com/2014/08/05/sprint-and-softbank-said-to-abandon-bid-for-t-mobile-us/.))
Despite these two missteps, the companies seem to have resolved their differences regarding control of the combined company, and are also confident the Trump administration will prove more amenable to the transaction than the Obama administration. Despite Son’s previously stated concerns about control, he seems to have acquiesced to SoftBank’s lessened role. The all-stock deal values Sprint at $26.5 billion and T-Mobile at $54.1 billion. ((Michael J. de la Merced & Cecilia Kang, Sprint and T-Mobile Agree to Merge, in Bid to Remake Wireless Market, N.Y. Times (April 29, 2018), https://www.nytimes.com/2018/04/29/business/dealbook/sprint-tmobile-deal.html.)) Deutsche Telekom (T-Mobile’s parent company) would own 42% of the combined entity and control nine of the fourteen seats on the board, while SoftBank would own 27% and control four seats, one of which would be held by Son. ((Id.)) Further, John Legere, T-Mobile’s current CEO, will lead the combined entity.
The subplot behind the inevitable antitrust review is arguably the most interesting facet of the proposed merger. At first glance, the lack of a break-up fee, a common component of merger agreements, seems to indicate that not even Sprint and T-Mobile are confident the deal will pass antitrust review. ((Drew Fitzgerald, Dana Cimilluca, & Dana Mattioli, T-Mobile Agrees to Buy Spring in $26 Billion Deal, Wall St. J. (April 29, 2018), https://www.wsj.com/articles/sprint-t-mobile-boards-vote-to-approve-all-stock-merger-1525017644.)) However, it could also just be an indication of the friendly nature of the transaction and the fact that they see each other as equals. It also makes sense that neither side would agree to a break-up fee considering regulators have opposed the merger in the past.
When the Department of Justice and Federal Trade Commission decide whether or not to oppose a merger, one of the important determinants is the Herfindahl-Hirschman Index (“HHI”). They calculate an industry’s HHI using the individual firm’s market shares. A variety of inputs can be used, but revenue is the most common. However, using unit market share–which in this case is represented by the number of subscribers–may also be useful. Using the market share based on the number of subscribers in the fourth quarter of 2017, the current HHI of the wireless carrier industry is 2,824, and post-merger it would be 3,257. ((Wireless subscriptions market share by carrier in the U.S. from 1st quarter 2011 to 4th quarter 2017, Statista, https://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/ (last visited Apr. 30, 2018); Pre-HHI = (35.46^2) + (33.37^2) + (17.11^2) + (12.64^2) + (1.2^2) = 2,824.91; Post-HHI: (35.46^2) + (33.37^2) + (29.75^2) + (1.2^2) = 3,257.46.))
The agencies generally look at the post-merger HHI and also the increase that results from the merger. ((U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) [hereinafter 2010 Guidelines], available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html.)) They classify markets in three ways:
(1) unconcentrated markets: HHI below 1,500;
(2) moderately concentrated markets: HHI between 1,500 and 2,500;
(3) highly concentrated markets: HHI above 2,500. ((2010 Guidelines § 5.3.))
The 2010 Guidelines indicate that because the change of 433 would occur in a highly concentrated market, the merger “will be presumed to be likely to enhance market power.” (Id.)) However, the 2010 Guidelines state that the “presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.” ((Id.)) Increasing the likelihood of antitrust review is the 2010 Guidelines’ emphasis on the disruptive role of a merging party. ((2010 Guidelines §2.1.5)) The 2010 Guidelines state, “the Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm, i.e., a firm that plays a disruptive role in the market to the benefit of customers . . . [when the maverick] threatens to disrupt market conditions with a new technology or business model, their merger can involve the loss of actual or potential competition . . . a firm that has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition [may discipline prices].” ((Id.)) Unfortunately for Sprint and T-Mobile, T-Mobile fits this definition closely.
When AT&T failed to acquire T-Mobile in 2011, T-Mobile went “maverick.” ((Bill Baer & Tom Wheeler, Here’s who loses big time if Spring and T-Mobile are allowed to merge, CNBC (May 19, 2017), https://www.cnbc.com/2017/05/19/heres-who-loses-big-time-if-sprint-and-t-mobile-are-allowed-to-merge-commentary.html.)) The firm abandoned standard-issue terms like two-year contracts and data limits and spent billions of dollars in investments. ((Id.)) They also lowered prices and offered to pay early termination fees for customers who switched to T-Mobile. ((Id.)) They even branded themselves as the “Uncarrier.” ((Joshua Sherman, What is an ‘Uncarrier’? We ask T-Mobile’s Chief Marketing Officer, Mike Sievert, Digital Trends (Jan. 23, 2013), https://www.digitaltrends.com/mobile/t-mobile-disruptive-mike-sievert/.))
Facing what seems like long odds, it seems as though Sprint and T-Mobile are leaving no stone unturned. Even Son’s post-election meeting in 2016 may have been part of a long-term strategy to curry favor with President Trump. ((See Landon Thomas Jr., T-Mobile-Sprint Merger Would Give Japan’s SoftBank Bigger Foothold in U.S., N.Y. Times (Apr. 29, 2018), https://www.nytimes.com/2018/04/29/business/tmobile-sprint-softbank-masayoshi-son.html.))
John Legere’s Twitter activity also seems like a pointed defense to regulators’ concerns. In his first tweet to announce the merger, he states, “[L]et me reiterate what I’ve said time and time again – everything [T-Mobile] does is for the benefit of customers – this move is no different. The New T-Mobile will supercharge the #uncarrier strategy for the entire country!” ((John Legere (@JohnLegere), Twitter (Apr. 29, 2018), https://twitter.com/JohnLegere/status/990628170843021313.)) This is a clear attempt to convince regulators that T-Mobile will continue to be a maverick and that the merger will not reduce competition in the marketplace. His next tweet states, “[T]he New [T-Mobile] will be the ONLY company able to bring a broad and deep nationwide 5G network – something no US wireless company could achieve alone in the critical early years of 5G #5GForAll.” ((John Legere (@JohnLegere), Twitter (Apr. 29, 2018), https://twitter.com/JohnLegere/status/990628172814340096.)) Again, this is a clear rebuttal to the likely argument that the increase in concentration will lead to lower investment and innovation in the industry. His third tweet speaks to how synergies will benefit consumers, “[W]ith [Sprint’s] incredible 2.5 GHz spectrum, [T-Mobile’s] nationwide 600 MHz +our other combined assets…Together, we will build the highest-capacity mobile network in US history!! I’m talking 30X more capacity than T-Mobile today!! #4GForAll.” ((John Legere (@JohnLegere), Twitter (Apr. 29, 2018), https://twitter.com/JohnLegere/status/990628174294913024.)) Last, in a clear appeal to President Trump and his focus on creating jobs, Legere tweets, “Speaking of jobs – From day one, The New [T-Mobile] will always have more US employees on payroll than both standalone companies. Last year we added 27k jobs associated with our growth. And there’s no reason we can’t grow at the same rate!” ((John Legere (@JohnLegere), Twitter, (Apr. 29, 2018), https://twitter.com/JohnLegere/status/990628186936479746.)) However, not all analysts are convinced. Roger Entner, an analyst with Recon Analytics says, “I would expect significant job losses, especially on the Sprint side, as this is a major source of the synergies between the two companies.” ((Edward C. Baig, T-Mobile and Sprint merger could cool cell-phone wars, which might have benefited consumers, USA Today (April 29, 2018), https://www.usatoday.com/story/tech/columnist/baig/2018/04/29/t-mobile-sprint-merger-lead-higher-prices-and-fewer-jobs/563012002/.)) One might also wonder, if they do not expect cost savings from labor synergies, how will they afford the increase in capital expenditures for 5G? It almost certainly means higher prices for consumers. It will be up to Sprint and T-Mobile to convince regulators that either there will be synergies elsewhere, or that 5G innovation is worth the price.
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