Markets Shouldn't Cheer the AT&T, T-Mobile Union
On Monday, the S&P500 stock index rose by 1.3% -- its third best day of the year. While there are always a number of factors that result in stocks rising, one of the biggest was the market reaction to the news that AT&T would acquire T-Mobile for $39 billion. Stocks gaining on big merger and acquisition deals is common enough. But under the current circumstances, the market shouldn't be cheering acquisition activity: it shows that firms are still cautious about the recovery -- not looking to expand.
But doesn't an acquisition suggest that a big firm wants to expand? In this case, it shows the opposite. More often than not, a horizontal acquisition like this one, which merges two competitors, results in more consolidation than growth for an industry. There's little doubt that if the deal goes through, jobs will be lost and retail stores will be shuttered.
AT&T may be looking to broaden its grasp on the market, but not by taking a risk to pursue growth. If AT&T saw the market as ripe for strong growth, it would have used that $39 billion to add new equipment and additional employees. Instead, its purchase reflects new ownership of current industry capacity. The strategy is to capture more of the current market, not to bet on its strong growth.
Moreover, the deal will almost certainly be bad for consumers -- which will make future economic growth more difficult. Sure, profits may be higher for AT&T as the wireless carrier oligopoly strengthens. But this probably means that Americans will face higher prices and face slower technological advancement. If they're spending more money on their wireless calling and data, but getting less technological growth for it, then this money will be less productive going forward.
Presumably, AT&T believes that the T-Mobile acquisition will cause its profits to grow more rapidly. But it doesn't believe that this will occur because it will enhance the industry's path of growth. Instead, it likely believes it will be better positioned to scoop up wireless users from Verizon and Sprint due to its lower costs to scale and other advantages that will come from buying a competitor. That's a very different source of profits than an industry's growth due to a more resilient U.S. economy.
Still thrilled about the deal? It shows that a big company would rather bet on consolidation than its industry growing. It will do nothing to help speed up the recovery; if anything it will result in lay-offs -- not hiring. It will also likely cause consumer spending to be less productive. All of these negative aspects of the deal assume that it succeeds in providing AT&T with higher profits. In other words, it's a best-case scenario. Markets shouldn't be excited about this acquisition.