Since late March of this year, AT&T's proposed $39 billion takeover of T-Mobile has dominated the U.S. wireless industry. Customers, outside interest groups, and government officials were quick to choose sides, but once AT&T filed its initial papers with the Federal Communications Commission and the U.S. Department of Justice in April, the deal was put in the hands of federal regulators. And today, the Feds answered back when the Justice Department filed a lawsuit (PDF) in federal court to block the merger.
Though the Justice Department's decision may sound like a death blow to AT&T's plans, that's actually not the case. It is a major inconvenience by all accounts and the fight is likely to be an uphill battle, but AT&T's dreams may not be dashed completely. In the following FAQ, CNET tells you why.
What exactly is the Justice Department's role in the process of a merger?
The U.S. government does not have the power to approve or disapprove of a merger. Companies are free to merge if they like, but for mergers and acquisitions of a certain size, they are required to notify the government of the transaction. This requirement was established under the Hart-Scott-Rodino Act, which mandates that companies involved in the merger provide the Federal Trade Commission and the Department of Justice with information about the merger before it occurs.
Once the companies have filed their paperwork, the FTC and the Justice Department review the information. The Justice Department looks to see if the proposed merger would violate any antitrust laws, such as the Clayton Act, which prohibits anticompetitive behavior that could harm consumers.
If the Justice Department thinks that the merger violates antitrust laws, it could ask the companies to restructure the deal and make certain concessions to eliminate the antitrust or anticompetitive issues. But if it feels that there is no way to mitigate the antitrust issues, it then sues to enjoin or block the merger.
At that point, the companies involved in the merger can give up and walk away from the merger or they can choose to go to court to fight the lawsuit to prove that the merger will not be anticompetitive.
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Full coverage of the merger from CNET
What are the Justice Department's reasons for filing the suit?
According to a statement, the Justice Department said its main concern is how the merger will affect competition, but it went on to say that the deal could result in higher prices, poorer quality services, fewer choices, and fewer innovative products.
"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 mobile wireless services," Deputy Attorney General James M. Cole said in a statement. "Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation's wireless carriers, particularly the four remaining national carriers. This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition."
More interestingly, the agency also called T-Mobile "a disruptive force" in the wireless industry by introducing the world's first Android handset, the T-Mobile G1, and the country's high-speed HSPA+ data network.
So what does the Justice Department's decision mean? Is this the end of the road for the merger?
It's certainly a big roadblock, but it doesn't stop the merger in its tracks completely. And if the FCC approves the transfer of spectrum licenses, the merger could still happen even with a court case pending. It's unlikely though (and somewhat risky) because the court may put a temporary injunction preventing the merger. But that hearing hasn't happened yet.
What is the FCC's role? I thought it had the power to approve or disapprove of the merger?
Like the Justice Department, the FCC can't accept or reject a merger proposal outright either. But for wireless carrier mergers (and those involving radio and TV networks) the FCC gets involved, because it regulates wireless spectrum. Specifically, the FCC grants or denies permission to transfer wireless licenses from one company to another. Since AT&T and T-Mobile have licensed their wireless spectrum from the FCC, it must approve the transfer of those licenses.
And since the whole point of doing a merger between two wireless companies is to combine wireless licenses, if the FCC doesn't approve the license transfers, it doesn't make sense to go through with the merger.
The FCC's review process when a wireless merger is proposed is done separately from the Justice Department. And the two agencies evaluate the mergers based upon different metrics. The Justice Department is looking for any violation of antitrust law. The FCC evaluates whether the deal is in the "public interest." This is a more broad review than the Justice Department's assessment, and it takes into account whether the deal will encourage competition and the deployment of new services, as well as whether it will increase prices or harm consumers through anti-competitive behavior.
What happens if the FCC approves the deal before the DOJ lawsuit is settled?
In theory, if the FCC gives its approval to transfer the wireless licenses, then AT&T could still go ahead with the merger. The danger is that if AT&T eventually loses its case in court to the Justice Department, it would have to unwind the transaction.
Finally, if the FCC approves the merger, one remaining sticking point will be how AT&T would divest of overlapping or redundant spectrum licenses. Earlier this month, CNET's Roger Cheng reported that AT&T could divest of more than $8 billion in assets if the merger goes through.
What if the FCC rejects the deal? Would the transaction be dead?
If the FCC said it doesn't see that the merger is in the best interest of consumers, it could reject the deal. Then AT&T would not be able to transfer the T-Mobile licenses and use that spectrum. So essentially, the deal would be dead. But AT&T could also appeal any decision made by the FCC.
How has AT&T reacted to the suit? What can AT&T do from here?
Of course, AT&T isn't happy. In a statement to CNET, senior executive vice president and general counsel Wayne Watts said the company was "surprised" given the previous meetings it held with the Justice Department. Watts also reiterated AT&T's long-established argument that the merger would boost job creation, alleviate a wireless spectrum crunch, and expand 4G deployment. "We believe facts will guide any final decision and the facts are clear," he said.
At this point, AT&T says it will fight the suit in court. And if it wins, the merger could still move forward, provided the FCC says yes. Of course, the FCC could reject to the transfer of licenses, but AT&T could appeal that decision as well. Another alternative is that AT&T could change the terms of the deal, though that it's unlikely to happen at this point.
What are T-Mobile's options?
Marguerite Reardon explores that topic in a related post. We'll say here, though, that T-Mobile and its parent company aren't pleased, either. In a statement to Ina Fried at AllThingsD, Deutsche Telekom Executive Vice President Philipp Schindera said the company "is very disappointed by the DOJ's action," and that it "will join AT&T in defending the contemplated merger against the complaint in court."
What does it mean for customers?
For now, it means nothing. For both AT&T and T-Mobile subscribers, it's business as usual until the merger is formally approved or rejected by the FCC. And even if it is approved, any changes wouldn't trickle down to T-Mobile or AT&T customers for a long time.
Sprint has forcefully opposed the merger. How has that carrier reacted?
It's safe to say that Sprint is ecstatic. Senior Vice President of Government Affairs Vonya B. McCann called it a "decisive victory for consumers, competition, and our country."
From almost the moment the merger was announced in March, Sprint has argued that the marriage would harm competition and consumers by leading to higher prices and poorer service in the wireless industry, impact America's economic growth, and stifle innovation by creating a duopoly between Verizon Wireless and AT&T. Considering that the Justice Department cited some of those very reasons in its suit, Sprint's lobbying campaign, particularly its points on AT&T's spectrum claims, appears to have paid off. On the downside, the Justice Department's decision also diminishes Sprint's chances of scooping up T-Mobile. The arguments the Justice Department will use to argue against AT&T's acquisition of T-Mobile may also apply to an acquisition by Sprint.
Does AT&T have any other government support?
Though some federal lawmakers have come out against the deal, it has won support from 26 state governors, 11 state attorneys general, and several members of Congress. None of those parties, however, has any official power to approve or deny the deal.
This sounds like a big legal mess. Is this court case likely to drag on for a long time before there's a decision?
It's hard to say how long this whole process may take. On the one hand, the federal courts generally try to resolve these issues quickly so that the companies involved in the litigation can go on with their business. Sometimes it can take as little as six months to resolve the case. The Oracle/PeopleSoft litigation is an example of a speedy case.
But since the FCC must offer its approval anyway, and the agency has said it will take about a year to complete its review, the court may give the Justice Department more time to build its case against AT&T. The longer the FCC delays in making its own determination, the longer the Justice Department is likely to have to research and build its case.
What is somewhat unusual about what's happening with the AT&T/T-Mobile deal is the timing of the Justice Department's lawsuit. Typically, the Justice Department waits as long as possible to file such claims, according to a lawyer who has worked for the agency but didn't want to be named. The merger was only announced in March. For the Justice Department to come to a decision to file suit in August, essentially suggesting that the agency sees no way that concessions can be made to make this deal palatable, is unusual, he said.