Is the AT&T Merger With T-Mobile USA Dead?

Given the U.S. Federal Communications Commission (FCC) staff opposition to the proposed AT&T merger with T-Mobile USA, it's fair to ask: Is the $39 billion deal dead? And if that's true, what happens to T-Mobile? Or to AT&T, which could face a multi-billion dollar penalty payment to T-Mobile if it walks away from the deal.

What just happened? A draft FCC order released Tuesday found the merger to be anticompetitive and contrary to the public interest . That's much the same view as the U.S. Department of Justice, which filed a lawsuit in federal court in August to block the merger .

It's likely that the critical FCC draft order will be approved (possibly in December) by the full Commission, which is made up of three Democrats and one Republican. That would push the matter before an administrative law judge for a full hearing.

If that happens, AT&T and T-Mobile would face at least two legal hurdles: the administrative law judge's review and the Department of Justice (DOJ) case in U.S. District Court for the District of Columbia. The federal court hearing is set for February, which would likely happen before the administrative law judge review.

What's the initial reaction? AT&T said it was disappointed with the FCC position and is "reviewing all options."

The Communications Workers of America union, which backs the merger, called the FCC's move a "job killer at a time of 9% unemployment."

Sprint, the third largest carrier, has consistently opposed the merger saying it would set up AT&T with T-Mobile and Verizon Wireless as a "duopoly" in control of U.S. wireless. A Sprint official reacted yesterday by quoting from FCC Chairman Julius Genachowski in August when he said there were "serious concerns about the impact of the proposed transaction on competition."

That Sprint official, Vonya McCann, Sprint's senior vice president of government affairs, added: "We appreciate Chairman Genachowski's leadership on this issue...." Genachowski was responsible for circulating yesterday's draft order of the FCC staff to the full commission.

What about reactions from uninvolved parties? Given the doubling of legal hurdles the merger faces, some analysts and experts think AT&T could walk away from the merger. But that would expose AT&T to a "walk-away" fee of potentially $6 billion in cash and spectrum rights it would be required to pay to T-Mobile under terms of its merger proposal.

"That's a big walk-away fee," said Maurice Stucke, an associate professor of law at the University of Texas College of Law and a former DOJ attorney. "Unless AT&T can reach some agreement with T-Mobile [on the walk-away terms] I don't see where AT&T can go with this."

Stucke said AT&T's position is much more limited by the FCC's action, since it could have used some sort of settlement with the FCC on the merger as a means of derailing the more important DOJ prosecution. "That's not happening now," he said in an interview. "An FCC settlement was one mechanism AT&T could have used to get out from under the DOJ.... I can't see any sort of bright shining light for AT&T."

Stucke, who has has penned a paper with another colleague arguing that the merger is anti-competitive, said there's still a possibility AT&T will "drag out the litigation, which would weaken T-Mobile -- that would be a victory for AT&T."

Gartner analyst Michael Gartenberg said AT&T won't give up easily. "AT&T will play to the final straw," he said. "They'll probably take it all the way to the end. If AT&T doesn't go ahead, it owes T-Mobile billions."

Some experts believe AT&T owes T-Mobile penalties even if it pursues the merger and then fails in federal court. "If it fails, that comes out of the consumer's pocket or the stockholder's pocket," said Gartner analyst Ken Dulaney.

Jack Gold, an analyst at J. Gold Associates, said AT&T's chances are "not dead yet" and that it would "use up all the appeals it can."

What's the fallout for T-Mobile if AT&T fails in its merger quest or backs away from the deal? "T-Mobile is already in a tight spot and needs to find a way to get a big brother," Gold said. "As the No. 4 carrier, it's in a weak competitive position."

Gold said if the merger fails, T-Mobile might maneuver to break itself up and sell some assets to AT&T and other carriers, even Sprint.

Dulaney said the FCC's opinion and the likely failure of the merger "is actually too bad.... T-Mobile will continue to struggle on its own. A merger would have given the customers of both networks better service using the increased spectrum."

What are AT&T's chances with the DOJ? Stucke believes that the DOJ has a fairly simple task in federal court to defeat the merger. "Under the law for mergers, the government only has to prove a merger may substantially lessen competition," he said. "The government doesn't have to prove the merger may increase prices or reduce innovation, or the like."

Stucke said the drafters of the pertinent law that matters in the AT&T case -- section 7 of the federal Clayton Act -- wanted to prevent price increases and other economic problems "in their incipiency" before a merger occurred.

The law, first written in 1914, was amended by Congress in 1950, at a time when Congress was concerned about economic cartels coming out of Europe and other regions, Stucke explained.

"Congress was worried at the time about U.S. companies being part of worldwide cartels led by [fascists]," Stucke said. "Today, the worry is that AT&T will be too big and too integral to fail, that AT&T could become so important in terms of the overall economic fabric that government can't allow it to fail."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen or subscribe to Matt's RSS feed . His e-mail address is mhamblen@computerworld.com .

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