Since AT&T Inc. announced Monday it was backing out of the $39 billion deal to avoid a lengthy and costly legal battle, the tech sector has been buzzing with what's next for both companies.
The acquisition of T-Mobile USA, a subsidiary of Germany-based Deutsche Telekom AG (PINK ADR: DTEGY), would have made AT&T the largest U.S. wireless carrier, leapfrogging current No. 1 Verizon Wireless (NYSE: VZ). It would have also thrown a lifeline to the ailing T-Mobile, the fourth-largest U.S. wireless provider behind Verizon, AT&T, and Sprint Nextel Corp. (NYSE: S).
But AT&T couldn't prove to the U.S. Justice Department, which filed an antitrust suit in August, that the deal wouldn't ruin competition by creating an industry duopoly. Ever since AT&T announced the plan in March, U.S. consumers feared future higher rates and fewer plan and phone options.
AT&T was gunning for more spectrum, or airwaves, to offer a higher-quality network than competitors. Without the airwaves that carry wireless voice and data signals, networks get clogged and providers can't operate - an increasing problem as the smartphone and tablet markets grow.
The deal's end offers investors a preview of where the sector is headed next year. Here's a breakdown of what to watch for when investing in tech stocks in 2012.
AT&T left with few options for growth: With the T-Mobile deal over, AT&T is desperate for spectrum. It'll now have to buy spectrum from a provider, search for another merger or takeover opportunity in the sector, or hope the U.S. government auctions more frequencies - both time-consuming and costly routes.
AT&T is also now slapped with a $4 billion break-up fee. The company had more than $70 billion in debt at the end of the third-quarter, and capital expenditures hit $14.7 billion in the first nine months of 2011. Plus, earlier this year it lost its exclusivity in offering the Apple Inc. (Nasdaq: AAPL) iPhone. These factors will weigh on growth in the New Year, making AT&T a weaker investment choice in the tech sector.
T-Mobile will struggle without strong partnership: With only 34 million wireless subscribers, T-Mobile has no chance of competing with the top three without a big merger opportunity. T-Mobile has passed on many of the latest smartphone models and has made little investment into developing a 4G network. It's the only major U.S. carrier not to sell the iPhone, and the only one that isn't building its own long-term evolution (LTE) network. It's also missed out on spectrum deals over the past few months while tied up with the AT&T lawsuit, and the company is in dire need of more network capacity.
The dropped AT&T opportunity opens the door for a new merger with No. 3 carrier Sprint. Rumors of a T-Mobile/Sprint tie-up swirled last spring before the AT&T deal evolved.
Now that parent company Deutsche Telekom is frustrated with U.S. regulators, it could start to aggressively look to sell its way out of U.S. markets.
Spectrum providers become hot commodities: Since wireless providers can't rely on the government to offer more airwaves, look for deals to heat up in the New Year between wireless providers and cable companies/spectrum providers.
Comcast Corp. (Nasdaq: CMCSA) and Time Warner Cable Inc. (NYSE: TWC) already signed a $3.6 billion deal Dec. 2 to sell licenses to airwaves to Verizon. This followed another Verizon deal with Cox Communications Inc., and the combination gives Verizon the highest-quality spectrum among U.S. carriers.
The most sought-after spectrum provider now is DISH Network Corp. (Nasdaq: DISH), on both AT&T and T-Mobile's radar. Analysts estimate that some of DISH's spectrum, which it bought for $3 billion, is now valued at $5 billion to $9 billion, according to Reuters. DISH said earlier this month it might start talks with T-Mobile if the AT&T deal fell through, while tech analysts have said AT&T could decide to make an offer not just for DISH's spectrum, but for the whole company.
DISH rose 9.23% yesterday (Tuesday). Wall Street's one-year price target is $32.05, a 17% premium to Tuesday's closing price of $27.46.
No. 1 Verizon gets even stronger: While AT&T bet on expanding with T-Mobile, Verizon has been beefing up its network capacity. This will help it better provide for its 108 million wireless subscribers. With its recent deals with Comcast, Time Warner, and Cox, Verizon will have 56% more 4G spectrum than AT&T in the top 10 U.S. wireless markets, and 46% more in the top 100.
Verizon won another victory over AT&T early this year when it announced it would sell the Apple iPhone. It plans in 2012 to roll out a 4G LTE service in 11 new markets, and offer a streaming video service like Netflix Inc. (Nasdaq: NFLX).
More bright spots for those investing in tech stocks in 2012: Verizon's third-quarter revenue rose 7.6% year-over-year, and net income skyrocketed 97%, and it offers a 5.2% dividend yield.
News and Related Story Links:
- International Business Times:
AT&T Ends $39 Billion Bid to Acquire T-Mobile USA
- Bloomberg News:
AT&T Left With Few Options After T-Mobile Bid
- The Christian Science Monitor:
AT&T calls off bid for T-Mobile. Now what?
- Money Morning:
Google-Verizon Deal Could Spell the End of "Net Neutrality"