The New Year brings a flurry of Top 10 lists and resolutions to lose weight. This year, in the wake of the burst of the telecom and Internet bubble, the New Year also brings predictions of major mergers in an industry that is considered to be "ripe for consolidation." While there are plausible cases to be made for potential mergers, there are also a number of reasons to believe that weight-loss vows are as likely to come to fruition as any "major" telecom merger. To begin with, most of the speculation focuses on potential mergers in the wireless telecommunications industry. Although it has lost some of its former glamour, the wireless industry still has significant growth potential. First, penetration (in the range of 40% of the U.S. population) is still well below the levels of much of Europe and other developed countries. Second, the industry is developing new "broadband" services that should stimulate demand both for new equipment and new services among current subscribers and new customers. Both of these factors also will require wireless carriers to obtain more spectrum (additional radio channels) to serve increasing demand. At the same time, competition in the wireless industry has driven prices - and profits - to historic lows. All of this suggests that two or more of the six nationwide wireless carriers may seek to merge in order to both increase their capacity to serve demand and to reduce competitive pressures on their bottom lines. Of these six, the two smallest in terms of subscribers, Nextel and T-Mobile, seem like the most likely acquisition targets. On the other hand, there are also a number of reasons why the long-awaited consolidation in the wireless industry may not happen.
Technology: Technical issues may prevent carriers from merging. First, there are several different technical standards in use in the United States today. Verizon, the largest carrier, uses CDMA, as does Sprint (number 4). Cingular (number 2) uses mostly TDMA and GSM in its networks, as does AT&T Wireless (number 3). T-Mobile (number 6) uses GSM exclusively while Nextel (number 5) uses a standard related to TDMA and GSM called IDEN. It is far easier and less costly for carriers that use the same standard to combine, which means that the pool of potential merger partners is seriously limited for each carrier from the outset.
Non-merger options: While a merger might provide additional spectrum for a carrier to expand its operations, wireless carriers have shown that they can obtain additional spectrum without a major merger. For example, carrier A will exchange 10 MHz of spectrum in New York for carrier B's 10 MHz in Los Angeles. In addition, carriers may now be able to obtain spectrum from NextWave, a bankrupt company that won more than 200 licenses in FCC auctions in 1996. The U.S. Supreme Court ruled on January 27, 2003 that the FCC could not revoke NextWave's licenses (see separate story) but that NextWave may choose to transfer some or all of its licenses to other carriers.
Money: A major merger will be costly. Just two years ago, Deutsche Telekom paid over $30 billion for VoiceStream (now T-Mobile), a distant sixth in the U.S. wireless industry. Although T-Mobile, like other wireless carriers, is now worth only a fraction of that amount, potential buyers are likely to have difficulty financing a merger. Banks will likely be reluctant to provide billions of dollars in cash to companies that are already struggling with massive debt. Moreover, stock in these companies is no longer the attractive currency it was a few years ago. Despite the widely held view that consolidation is an economic imperative in the wireless industry, and in the telecom sector in general, consolidation will be costly and difficult to finance.
Regulatory obstacles: Finally, if two or more of the nationwide wireless carriers do decide to merge, they will need to clear both FCC and antitrust review. Both the FCC and the antitrust authorities will assess such a transaction based on its effect on competition. Some of the potential transactions, such as a merger between Verizon and Sprint or Cingular and AT&T, would substantially increase concentration in the wireless telecommunications market. It is by no means certain that such a merger would pass regulatory muster. The FCC recently decided not to issue formal guidelines for wireless mergers, which means that any merger will be subject to an ad hoc review.
Despite all of this, there are reasons to believe that 2003 could be a year of consolidation in the wireless industry. But, as with many other New Year's resolutions, the results may be quite different from initial expectations.
For more information on any of these activities, please contact Kelly Cameron at kcameron@pgfm.com.
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