“Straight Talk” T-Mobile & Sprint Merger Talks Intensify

The reports out of Wall Street on Tuesday were that two wireless telecommunications giants, T-Mobile and Sprint, were in negotiations on a potential merger. The reporting from CNBC has been great on this topic, and according to that trusted news source, there has been no exchange ratio determined to this point.

That is an indication that talks are still in an early stage but CNBC also added that the negotiations on the term sheet had begun. The period of term sheet negotiations can lag for a while or move relatively quickly depending on the parties involved in the potential merger. I have covered mergers where the meetings to figure out the parameters of the term sheet could get contentious, obviously much of that is centered around the valuation of given assets in the deal.

These two particular companies have discussed joining forces at least a few times in the past several years. The difference between those prior attempts and this potential merger opportunity is that the current proposal is expected to be an all stock transaction. The prior attempts at merging the two companies involved cash which brings in other variables around valuations of certain other operational components.

The main reason that these two mobile phone service providers are seeking to merge is one of the usual reasons: cost synergy. That rationale has come up often in my prior writing on M&A activity, and this deal stands to provide billions of dollars of cost savings due to the synergies involved in these businesses.

T-Mobile and their parent company, Deutsche Telecom, would become the lead party in the combined company. This translates to the average person to mean that if the two companies did link up – the combined company would be known as T-Mobile. It is too early to know, and it is unclear whether it will change, that they will keep the two names in the marketplace operating essentially as different brands with the same parent owner.

Sprint and their parent company, Softbank, expressed interest to work a deal with T-Mobile again earlier this year. The sources around the negotiations state that the understanding is that the CEO of T-Mobile, John Legere, would lead the combined company.

However, it is also being reported that the top guy at Softbank, Masayoshi Sun, wants a position of significant input into the daily operations of the potential combined entity. This scenario, in my experience covering mergers, always presents a whole other set of complications to the deal being completed.

In addition, it should be noted that the personnel involved in researching this type of transaction at T-Mobile has not begun their review of the balance sheet at Sprint. This review could (and very often does) change the terms of the structure of the deal. It also could become a factor in T-Mobile backing out of the process if it is determined that the current financial picture at Sprint is not advantageous for M&A activity.

Furthermore, the other variable which cannot be underscored is the anti-trust situation. The regulatory aspect from the federal government entities involved in a merger of this magnitude can frequently create several hurdles that could sidetrack a potential deal to the point that it never materializes.

In this case, we are dealing with a significant alignment of the third largest and fourth largest mobile telecommunication companies in the United States. The scrutiny from the federal anti-trust regulatory authorities is going to be significant. That level of scrutiny usually causes one side of the potential merger to disband the process. The possibility that T-Mobile could bow to the pressure exerted by federal regulators and pull the plug on this deal is one potential outcome of this situation.

The motivating factor for both T-Mobile and Sprint is a common one: remain competitive with the top two players in the industry, Verizon and AT&T. Those two behemoths keep getting larger and more diversified in their holdings with Verizon recently acquiring Yahoo and AT&T obtaining more media companies to go along with their blockbuster merger with DirecTV.

The pricing, network coverage, and service options (AT&T bundles services with DirecTV packages, Verizon bundles cell phone plans with FIOS TV packages) makes for competitive disadvantages for T-Mobile and Sprint. It is my belief that if T-Mobile and Sprint joined forces that the branding message would be crafted around their focus on mobile devices and the fact that they are not involved in other businesses in media.

It is very early in the process for this potential merger, anything could break one way or another with regard to the probability of it being carried to fruition. The fact remains that beyond all the “straight talk” the companies are engaging in at this point with the term sheet, is that this merger has several boundaries to overcome.

The stock valuations on the term sheet, the fact that both holding companies do not totally own all of the companies they are trying to consolidate, the role of John Legere versus Mr. Sun and his “seat at the table” demands, the balance sheet health of Sprint, and the anti-trust pressures; are all factors that could derail this deal off the tracks at any point.

The average consumer should keep tabs on this merger because it could further limit the competition and the competitive balance in the cell phone marketplace. This could lead to unfair or burdensome cost increases to the consumer and a lack of choice in their carrier. It effects an area that hits close to home to a great majority of the American public: their cell phone.

In the end analysis, it is going to come down to the same set of factors that most M&A activity revolves around: is the cost savings from the synergies obtained from consolidation worth the effort, headache, and manpower hours needed to complete the merger. The next few months will provide many of those answers as T-Mobile and Sprint move forward in this long process that merits the attention of the consumer.

Call Waiting: Verizon Back Peddles On Merger Rumors

The news out of Verizon on Thursday is that the comments made by their CEO, Lowell McAdam, were taken out of context regarding a potential merger involving the telecommunications giant.

The CFO of Verizon, Matthew Ellis, attempted on Thursday to clarify earlier remarks made by Mr. McAdam to the media. Those comments alluded to a potential merger of Verizon with Disney, Comcast, or CBS.

However, Mr. Ellis today offered a different explanation in stating that Mr. McAdam was answering a question about whether or not he would “take a call” from Disney, Comcast, or CBS. The comments are now being walked back by Verizon, today they clarified that they would be open to strategic partnerships with those entities and not an actual merger.

This clarifying statement from Verizon comes after several financial news sources ran with a story that Verizon was exploring a merger, and the stock prices of those three entities involved: Disney, Comcast, and CBS all saw increased trading activity.

It is no secret that Verizon is looking to grow certain aspects of their business, the acquisition recently of Yahoo is proof of that strategy. The senior management at Verizon have steered away from obtaining other large media companies, which is unlike their other competitors in this space. The deal between AT&T and DirecTV jumps to mind as the type of avenue to growth that Verizon has repeatedly avoided.

The earnings call with Mr. Ellis today described what Verizon calls “organic growth” of the company. The exact definition of that strategy is not completely defined, but like any other communications provider and internet service provider, Verizon is consistently looking for content. The old “content is king” mantra is still paramount in this industry space.

In an increasingly visual world, the demand for video content is at the core of what Verizon needs to fill within their own content pipeline. It is in this vein that a strategic partnership or some sort of partnership agreement with Disney, Comcast, or CBS would make sense for Verizon. Those entities have their own exclusive content or partnerships to provide content for other entities such as Major League Baseball, the National Football League, and the National Hockey League.

The demand for sports content is always robust and the demand for other types of entertainment in digital platforms is a demand curve that Verizon is going to be relentless in trying to meet over the next several months. The earnings call also came on Thursday amidst reports that the Verizon FIOS television service has lost over thirteen thousand subscribers in a short amount of time.

The streaming media services and the growth of other platforms to watch content is causing many Americans to “cut the cord” on cable, telco, and satellite TV services. The “on demand” culture and the binge watching patterns of the new ways that consumers expect has caused the drop off in the FIOS subscriptions.

This could create conditions where FIOS, AT&T/DirecTV, and Comcast are forced to reinvent themselves and provide more value to the consumer for the service. The advent of the DirecTV service that allows the viewer to watch at home or on a tablet or smart phone is a step into the future of the television trends to follow.

The question of whether or not Verizon is exploring a merger is a complicated one. It would make some degree of sense on one hand given the complexities facing the industry and the changing dynamics of digital content consumption.

Verizon is also prepared to face rather significant anti-trust regulatory reviews especially if they were to merge with Comcast, which would absolutely create a monopoly in the industry. That merger would have far-reaching implications for both private homes and small businesses as the internet is needed for doing really everything today from shopping, to watching movies, and to work related functions.

It remains to be seen whether Mr. McAdam was taken out of context, or whether there is more than meets the eye with this story. The ambitions of Verizon will come into focus in the near future. The company should, at the very least, consider some kind of partnership with another media company to fill the video content gaps that exist currently.

Verizon also knows that mergers or acquisitions are a complicated process and that ties up time and resources from being able to grow the company in other ways. In the end, only time will tell which direction they choose to grow their business in an increasingly competitive, evolving, and cost driven environment.

Collapsing Net: Verizon Swallows Up Yahoo

The news that media/telecom giant Verizon has obtained the core businesses of Yahoo for over $4 billion comes as no surprise. The deal had been in the works and the Verizon executive leadership had been interested and stated that interest for months regarding the potential acquisition of Yahoo.

The component that I think myself and others in the general public have with this deal is two-fold: the huge companies seem to just get even larger, and one of the last big names from the glory days of “the Net” has gone by the wayside.

This news is just further evidence that the world is changing and that the technologies and methods of communicating are shifting away from the traditional ways we had once utilized the internet (email, news sites, blogging) to an even faster paced use of social media sites, instant messaging applications, Instagram, and Snapchat.

In fact, part of the Yahoo business portfolio which was very attractive to Verizon in this transaction was the social media platform called Tumblr (which I have a blog site called “The Write Path”) which will be folded in to the stable of other Verizon owned websites with targeted advertising planned for that millennial demographic which frequents the platform.

Verizon, which purchased AOL previously, will most likely merge Yahoo with AOL in a combination of two former internet powerhouses to compete against Google and Facebook. That being stated, the expectation from Verizon and everyone else with knowledge of that industry is not that Verizon anticipates surpassing those two behemoths, it is the fact that being in that top tier with the amount of advertising dollars floating around is still a great spot to land in.
It is estimated that about one billion users a day visit some portion of the Yahoo family of websites. In my own experience, having written several contributing pieces for Yahoo through their freelance news division, the sites have a network of really devoted users. That was the main driver behind this deal for Verizon: the ability to get that many users looking at their mobile advertising. The number of loyal users for Yahoo properties enabled them to leverage a better deal from Verizon than was initially anticipated.

The other winner out of this deal is the NFL and football fans because Verizon streams games on Sundays and they can expand their reach with Yahoo as the NFL looks to sell streaming rights to their other live game packages. That is going to be an interesting development to watch closely in the coming months.

The demise of Yahoo is sad to me on a personal note because I have been a loyal user on their site since the beginning and have worked for them as a contract writer for a period of time as well. The concept for the company and the brand was very well thought out at one point, for many of us, Yahoo was our introduction to the wide world of the internet and to search engines.

It has now gone the way of so many other companies or brands in America, it has been consolidated by a bigger company. The company changed the way we all did things and it changed our collective lifestyles. It will now evolve into something else as the internet and social media makes a new turn into a new area of which is still yet to be determined. It is the nature of things, but it is still sad to see another iconic brand go away.

The internet has shaped how we get information: news, restaurant reviews, recipes, and stock market reports. It evolved into social media and the next step will probably be one of further customization and networking of people together in a unique platform. It will be interesting to see how Verizon reinvents Yahoo to adjust to those changes in the terrain.