What Does the Stock Market Tell Us in the Aftermath of the Failed AT&T / T-Mobile Merger?
In the wake of the announcement that AT&T and T-Mobile are walking away from their proposed merger, there will be ample time to discuss whether the deal would have passed muster in federal court, and to review the various strategic maneuvers by the parties, the DOJ, and the FCC. But now is a good time to take a look at what the market is predicting — and what that has to say about the various theories offered concerning the merger. In prior blog posts, we’ve examined the stock market reaction to various events surrounding the merger — and in particular, the announcement that the DOJ would challenge it in federal court.
For a brief review, there are two primary theories that the merger would reduce competition and harm consumers. Horizontal theories predict that the post-merger firm would gain market power, raise market prices and reduce output. On these theories, Sprint and other rivals’ stock prices should increase in response to the merger; thus, if the DOJ announcement to challenge the merger reduces the probability of the post-merger acquisition of market power, Sprint stock should fall in response. We know that it didn’t. It surged. That is consistent with a procompetitive merger because the challenge increases the probability that the rival will not face more intense competition post-merger. Thus, Sprint’s surge in reaction to the DOJ announcement is consistent with the simple explanation that the merger was procompetitive and the market anticipated more intense competition post-merger.
Of course, as AAI and others have pointed out, Sprint’s stock price surge in response to the merger challenge was also consistent with “exclusionary” theories of the merger that posit that the post-merger firm would be able to foreclose Sprint from access to critical inputs (in particular, handsets) required to compete. Richard Brunell (AAI) made this point in the comments to our earlier blog post, relying upon the fact that Verizon’s stock fell 1.2% (compared to market drop of .7%) to emphasize the applicability of the exclusion theory. The importance of Verizon’s stock price reaction, the argument goes, is that while Sprint has to fear exclusion by a combined ATT/TMo, Verizon does not. Thus, proponents of the exclusion theories assert, the combined surge in Sprint stock with Verizon’s relative non-movement is consistent with that anticompetitive theory.
Not so fast. As I’ve pointed out, this conclusion relies upon an incomplete exposition of the economics of exclusion and one that should be difficult to square with your intuition. If Verizon has nothing to fear from the post-merger firm excluding Sprint, it should greatly benefit from the merger! Consider that if the exclusion theories are correct, Verizon gets the benefit of free-riding upon AT&T’s $39 billion investment in eliminating or weakening one of its rivals. Surely, the $39 billion investment to exclude Sprint and other smaller rivals — as the exclusion proponents argue is the motive for merger here — provides considerable benefits to Verizon who doesn’t pay a dime. Thus, rather than holding constant, Verizon’s stock price should fall significantly in response to the lost opportunity to appropriate these exclusionary gains for free. Verizon’s stock non-reaction to the announcement that DOJ would challenge the merger was, in my view, inconsistent with the exclusion theories. In sum, the market did not appear to anticipate the acquisition of market power as a result of the merger.
We now have a new event to use to evaluate the market’s reaction: AT&T and T-Mobile abandoning the merger. It appears that, once again, Sprint’s stock price surged in reaction to the news (and now up about 8% in the last 24 hours). Again, Verizon doesn’t move much at all.
Stock market reactions and event studies — and I’m not claiming I’ve done a full blown event study here, just a simple comparison of stock price reactions to the market trends — produce valuable information. They are obviously not dispositive. The market can be wrong. But so can regulators. And as my colleague Bruce Kobayashi said in an interview (which I cannot find online) in Fortune Magazine evaluating the market reaction to the Staples-Office Depot merger in light of the FTC’s challenge: “It boils down to whether you trust the agencies or the stock market. I’ll take the stock market any day.”
Markets provide information. The information provided here gives no reason to celebrate the withdraw on the behalf of consumers, or even the ever-present “public interest.” Celebratory announcements to the contrary should be read with at least a healthy dose of skepticism in light of information above (and see also Hal’s excellent post) that the market did not anticipate the merger to facilitate the acquisition of market power via the combination of AT&T and T-Mobile or through the exclusion of Sprint. Media reports that the merger was a “slam-dunk” in terms of the economics or that this is a tale of dispassionate economic analysis defeating the monopolist lobbying machine are misleading at best. More importantly for the future, abandoning this merger does not repeal the spectrum capacity constraints facing the wireless industry, the ever-increasing demand for data, or the dearth of alternative options (despite the FCC’s claims that non-merger alternatives abound) for acquiring spectrum efficiently.
This will be a very interesting space to watch as the agencies deal with what will undoubtedly be other attempts to consolidate spectrum assets — especially in light of the FCC Report and the framework it lays down for evaluating future mergers.