Early in the morning on Aug. 31, AT&T CEO Randall Stephenson appeared on CNBC, promising to bring 5,000 new jobs to the United States if his company was allowed to buy rival T-Mobile.
But just hours later, Justice Department officials announced their intention to sue to block the $39 billion merger, a move that would be the beginning of the end for a deal that would have created the largest wireless carrier in the U.S. AT&T said it was “surprised and disappointed.”
That contrast between AT&T’s rosy optimism and federal officials’ uncompromising smackdowns came to mark the merger bid that officially ended on Monday. The failed attempt, which will cost AT&T $4 billion in breakup fees besides legal and other costs, left observers wondering how a company with the legal, lobbying, and political presence of AT&T could have seemingly misread the Washington situation so badly.
The Justice Department’s lawsuit and opposition from the Federal Communications Commission were among a series of blows that sometimes seemed to catch AT&T and its cadre of Washington’s top lawyers off guard.
“There was definitely a miscalculation,” said Richard Brunell, director of legal advocacy for the American Antitrust Institute and a former trial lawyer for the Justice Department. “This is a lesson for firms in the future: Always expect mergers to be problematic.”
AT&T declined to comment for this article.
AT&T spent $16 million on lobbying from January to September, and rolled out a long string of endorsements from lawmakers in Congress, state governors, unions, and nonprofit groups. Federal agencies like the Justice Department and the FCC don’t operate in a vacuum, and lobbying efforts can put pressure on the relatively apolitical regulatory and law enforcement processes, Brunell said.
But those efforts never really came into play. Nor was it particularly close. The process never made it to wrangling over merger conditions, when political clout could be more valuable. The Justice Department acted more quickly than expected, and left little room for AT&T to maneuver. When the FCC moved to block AT&T’s application to buy T-Mobile’s spectrum licenses, it was game over.
Once the merger process began, financial and political inertia dictated that AT&T continue to pursue the deal after increasingly ominous signals from federal regulators. Before AT&T and T-Mobile USA’s parent company Deutsche Telekom unveiled the plan in March, however, there was still time to turn back.
But analysts say that even for experienced lawyers, many of whom have worked for federal agencies, launching such a deal is largely a roll of the dice.
“They took a calculated gamble,” said Potomac Research Group telecom analyst Paul Glenchur. “The only real way to get direction from an agency is to file your application.”
AT&T's longtime outside counsel, Richard Rosen, for example, has long-standing ties to the Justice Department. Despite deep connections with the agencies involved, AT&T is a public company and its legal team likely would not have discussed a potential deal with Justice before announcing it, hindering its ability to gauge the department’s reaction to the deal, said Allen Grunes, a former DOJ antitrust lawyer who now represents Dish Network, which opposed the deal.
“I don’t think they thought this was a slam dunk,” Grunes said. Still, obstacles such as Sprint’s decision to hire its own crack legal and economic team; Christine Varney’s departure as head of the Justice Department’s Antitrust Division in the midst of the investigation; and the Justice Department’s swift move to completely block the merger made an already steep climb impossible, Grunes said.
In a key finding, the Justice Department also concluded that competition should be calculated on a national, rather than local, level. AT&T had argued that it faced competition from smaller, regional wireless carriers in many local markets. But Justice Department lawyers rejected that notion, throwing out a major portion of AT&T’s case.
Some observers saw signs that AT&T based its plan on past mergers, which had faced a more flexible process under the George W. Bush administration.
“The Obama antitrust enforcers are certainly more willing to go to court,” said David Balto, a former antitrust lawyer at the Justice Department and Federal Trade Commission.
And Craig Aaron, president of Free Press, which campaigned against the merger, said AT&T “undoubtedly” looked at other mergers for precedence.
“I can see how they made that calculation, because there have been a lot of mergers rubber-stamped recently,” Aaron said.
But Glenchur argued that recent mergers such as those between NBC Universal and Comcast, and between Live Nation and Ticketmaster, were vertical, rather than horizontal mergers, a distinction AT&T would have understood.
“I’m sure AT&T’s counsel recognized that a horizontal merger would be a tougher sell, but you don’t really know until you cut a deal,” he said.