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NYTimes DealBook:

The Justice Department filed a complaint on Wednesday to block AT&T’s proposed $39 billion acquisition of T-Mobile, a deal that would create the largest carrier in the country and reshape the industry.

The complaint, which was filed in the United States District Court for the District of Columbia, said that T-Mobile “places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition.” The complaint also highlighted T-Mobile’s high speed network and its innovations in technology.

The complaint(PDF).

Department of Justice Statement:

In order to ensure that competition remains and that everyone – including consumers, businesses and the government – continues to receive high quality, competitively priced mobile wireless products and services, the Department of Justice today filed an antitrust lawsuit in U.S. District Court in Washington, D.C. to block AT&T’s acquisition of T-Mobile.

The Department filed its lawsuit because we believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services.

 

More detailed analysis after I read the complaint.

Quick stuff - the Justice Department is alleging that T-Mobile and ATT are competitors in the wireless business:

AT&T, with approximately 98.6 million connections to mobile wireless devices, and T-Mobile, with approximately 33.6 million connections, serve customers throughout the United States, with networks that each reach the homes of at least 90 percent of the U.S. population. AT&T and T-Mobile are two of only four mobile wireless providers with nationwide networks and a variety of competitive attributes associated with that national scale and presence.
The other two nationwide networks are operated by Verizon Wireless ("Verizon") and Sprint Nextel Corp.

Sounds obvious, but defining competition and competitors is at the heart of the formula for merger/acquisition approval. Thus, the formula here is a 4 to 3 (from 4 competitors to 3.) This is not per se, an unapprovable acquisition because of that. The Government has to prove more (though the issue of the FCC's discretion is one I need to study and understand. I am providing a purely antitrust law as I understand it and experienced it analysis.) More as a I read.

Why taking T-Mobile would have an anti-competitive effect beyond the 4 to 3:

T-Mobile in particular -a company with a self-described "challenger brand," that historically has been a value provider, and that even within the past few months had been developing and deploying "disruptive pricing" plans -places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition. AT&T's elimination of T-Mobile as an independent, lowpriced rival would remove a significant competitive force from the market.

According to Justice, T-Mobile is a price competition driver in the market. More as a I read.

Defining the relevant market:

Mobile wireless telecommunications services include both voice and data services (e.g., texting and Internet access) provided over a radio network and allow customers to maintain their telephone calls or data sessions wirelessly when traveling. Mobile wireless telecommunications providers offer their services on a variety of devices including mobile phones, smartphones, data cards, tablet computers, and netbooks. In addition, an increasingly important group of customers are building mobile wireless capability into new devices, such as e-readers and vehicle tracking equipment, and contracting for mobile wireless telecommunications services on behalf oftheir own customers. There are no cost-effective alternatives to mobile wireless telecommunications services. Because neither fixed wireless services nor wireline services are mobile, they are not regarded by consumers of mobile wireless telecommunications services as reasonable substitutes. In the face of a small but significant price increase imposed by a hypothetical monopolist it is unlikely that a sufficient number of customers would switch some or all of their usage from mobile wireless telecommunications services to fixed wireless or wireline services such that the price increase or reduction in innovation would be unprofitable. Mobile wireless telecommunications services accordingly is a relevant product market under Section 7 of the Clayton Act, 15 U.S.c. § 18.

Why divestitures can't cure the anti-competitive effects of the acquisition, according to Justice:

In competing for customers in the 97 markets identified in Appendix B and other CMAs, AT&T and T-Mobile (as well as Verizon and Sprint) utilize networks that cover the vast majority of the U.S. population, advertise nationally, have nationally recognized brands, and offer pricing, plans, and devices that are available nationwide. For a variety ofreasons, there is little or no regional variation in the pricing plans offered by the Big Four nationwide carriers. [. . .] Similarly, when the Big Four carriers make devices available to the public, they typically make them available nationwide. [. . .] In addition, the Big Four carriers generally deploy system technology on a nationwide basis, including critical components such as network standards, e.g., LTE or HSPA+. These technological choices are an important aspect of competition in the mobile wireless telecommunications services market.

The national decision-making of the Big Four carriers results in nationwide competition across local markets. Each of the Big Four firms making a competitive choice regarding a pricing plan, or other national competitive attribute, will consider competitive conditions across the United States, as the decision will take effect throughout the United States. Because competitive decisions affecting technology, plans, prices, and device offerings are typically made at a national, rather than a local, level, the rivals that affect those decisions generally are those with sufficient national scale and scope, i.e., the Big Four.

In short, it is a national market comprised of local markets. Divestitures won't work.

 

p>In short, it is a national market comprised of local markets. Divestitures won't work.

Measuring concentration - the HHI (Herfindahl-Hirschman Index)-

Concentration in relevant markets is typically measured by the Herfindahl-Hirschman Index ("HHI"), which is defined and explained in Appendix A to this Complaint. Preliminary market share estimates demonstrate that in 96 of the nation's largest 100 CMAs -all identified in Appendix B as representing relevant geographic markets for mobile wireless telecommunications services -the post-merger HHI exceeds 2,500. Such markets are considered to be highly concentrated. In one additional CMA identified in Appendix B, the post-merger HHI falls just below 2,500 and the market would be considered moderately concentrated.

If this standard holds, that's all she wrote. It's not a close case and there is not a divestiture fix.

My final piece for now (have to do other stuff), this is not a close call for Justice if the market definitions are not malleable:

Nationally, the proposed merger would result in an HHI ofmore than 3,100 for mobile wireless telecommunications services, an increase ofnearly 700 points. These numbers substantially exceed the thresholds at which mergers are presumed to be likely to enhance market power.

In the national market for mobile wireless telecommunications services provided to enterprise and government customers, the proposed merger would result in an HHI of at least 3,400, an increase of at least 300 points. These numbers exceed the thresholds above which mergers are presumed to be likely to enhance market power.

Justice goes on to argue other points, such as barriers to entry, etc., but at the heart of the analysis is the market concentration, which is presumed to be anti-competitive at those HHI levels.

I'm not seeing a deal here. ATT would have to win in court. It seems they intend to try:

In a statement, AT&T said: “We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the D.O.J. that this action was being contemplated.

“We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The D.O.J. has the burden of proving alleged anticompetitive affects and we intend to vigorously contest this matter in court.”

That could mean a potentially lengthy court fight. Companies have triumphed over the Justice Department before, such as a federal judge sided with Oracle in its purchase of Peoplesoft in 2004.

AT&T has one powerful incentive to try to salvage the deal. Under the terms of the agreement that AT&T signed with Deutsche Telekom, AT&T would pay a breakup fee of $3 billion in cash, as well as a roaming agreement and spectrum rights — an estimated total value of $6 billion — if the acquisition did not go through for regulatory reasons.

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