Few Winners in Heated Cellphone Wars

If you are wondering who will be your cellphone provider next year, so are the cellphone companies. Maneuvers by American cellphone providers to acquire one another are threatening to erupt into all-out war. And the question is not only which ones will survive, but whether the survivors will be ruined by the prey they are rushing to swallow, leaving consumers by the wayside. The first move occurred in 2011, when AT&T made a bid to acquire T-Mobile U.S.A., the American subsidiary of Deutsche Telekom, which had been looking to sell it for a long time. AT&T’s move was brave, considering the well-known antitrust concerns. As part of the deal, T-Mobile was put in the awkward position of arguing to antitrust regulators that it might not survive if it wasn’t acquired because of its smaller size and its annual revenue of only $21 billion. It was a bad move for AT&T. Regulators blocked the deal, and the company walked away poorer by about $6 billion — the $4 billion it was required to pay over the failed acquisition plus the estimated value of the broadband licenses it was required to grant T-Mobile.

The failure should have made other carriers wary. Instead, the message was that unless you acted soon to get bigger, you were not likely to be in the cellphone business for long. And bigger means big enough to challenge AT&T and Verizon Wireless, the two 800-pound gorillas in the wireless arena, with about two-thirds of the United States market, according to Strategy Analytics, and more than 200 million subscribers combined. The runners-up in the market, Sprint and T-Mobile, knew they had to scramble to get bigger. And behind them were the poor cousins, Leap Wireless and Metro PCS, regional wireless services also looking to grow. The stage was set to unleash the investment bankers.

Sprint and Metro PCS came close to a merger this year, but Sprint’s board scrapped a deal at the 11th hour. Metro PCS then went down the short list of other targets and agreed to a deal with T-Mobile, announcing a combination this month. If completed, joining the two would create the third-largest mobile phone operator with 42.5 million subscribers. And the combination is really an acquisition of T-Mobile by Metro PCS with a $1.5 billion dividend kicker paid to Metro PCS shareholders. This dividend is much less than Metro PCS shareholders could get in a sale. But this is the price that management is paying to get larger. Expect Deutsche Telekom, which will own 74 percent of the combined entity, to sell its shares quickly when, and if, the deal closes.

MetroPCS, however, was thinking broadly when it announced a combination with T-Mobile. According to people close to Metro PCS, it is also trying to nudge Sprint to make a “put up or shut up” move to acquire it — either now or after it combines with T-Mobile. Sprint’s alternative is to become the odd man out, left behind by bigger and fiercer competitors. Many expected Sprint to immediately take the bait and start a counterbid for Metro PCS. Instead, Sprint responded last week with an out-of-the-box move, announcing that SoftBank, the Japanese telecommunications behemoth, would acquire 70 percent of the company for $20.1 billion. The money would be used to buttress Sprint’s finances, presumably for more deal-making and expansion. Flush with potential cash, Sprint quickly agreed to spend about $100 million to acquire a stake from Craig O. McCaw in Clearwire, the broadband service provider. This would raise Sprint’s stake to 50.09 percent of the votes from 48.6 percent. Clearwire’s stock slid on the news, as the market concluded that Sprint would now be uninterested in acquiring the remaining shares. Such an acquisition didn’t make sense, because Sprint already controlled the board and appointed seven of 13 directors. But what is clear is that Clearwire has become just another pawn in the cellphone wars.

Let’s all acknowledge at this point that I’m dizzy trying to keep track of everything. Left out of this deal-making party so far is Leap Wireless. In August, its chief financial officer acknowledged that the company might sell itself. Leap’s stock fell 18 percent the day of the announcement that Metro PCS and T-Mobile were combining under the assumption that it no longer was an attractive acquisition target and would not be part of the deal-making. That may be true — for now. Yet it is unlikely that Leap will be left out. That is because we are heading to a place where there are likely to be three big wireless companies in the United States, but not many more. And the big will continue to get bigger as they scoop up telecommunications companies with access to excess broadband spectrum. While the endgame may be apparent, one has to wonder whether the wireless industry is in danger of entering the fog of deal-making. We’ve seen this story before — in the battle over RJR Nabisco that was made famous by “Barbarians at the Gate” and in deal-making frenzy during the dot-com boom. When faced with a changing competitive landscape, executives spend billions because they believe they have no other choice. The cost to the company — and to shareholders — can be immense. In this world, executive hubris tends to dominate as overconfidence and the need to be the biggest on the block cloud reason.

Witness the comments of SoftBank’s chief, Masayoshi Son, who told Jim Cramer on CNBC after the announcement of his company’s investment in Sprint that “I am a man, and every man wants to be No. 1, not No. 2 or No. 3.” Not so coincidentally, the deal would make SoftBank only the third-largest global wireless carrier. AT&T has already lost an estimated $6 billion in the cellphone wars. This is no small change. The rush to complete deals is an investment banker’s dream. But the hunt may lead these companies to not only overpay but acquire companies that are underperforming or otherwise don’t fit well. Then they have to find a way to run them profitably. And it may be that it is not being large that is crucial to winning in this game, but technical innovation. That is what Apple found out to great success. So far in the cellphone wars, these other considerations appear meaningless. For consumers, this means that there is likely to be less choice as wireless carriers disappear. And whether service will improve or large carriers will simply occupy more space is unknown. Regulators, meanwhile, are likely to stand aside from these smaller deals, instead buying the argument that AT&T and Verizon need a bigger third competitor to stand up to it. It remains to be seen if that is true, but in the heat of the moment, cellphone executives believe there is no choice but to acquire one another. And in these wars, it is all about making a deal. Consumer concerns are secondary.