The Simple Difference Between the AT&T-Time Warner and T-Mobile-Sprint Mergers

With a federal court just clearing AT&T 's (NYSE: T) proposed merger with Time Warner (NYSE: TWX) yesterday, there was a sense of renewed optimism in the market on Wednesday regarding other blockbuster deals that may face better odds with obtaining regulatory approval. Comcast  was reportedly waiting on the court decision regarding AT&T and Time Warner before unveiling its own bid for certain Twenty-First Century Fox  assets, one that would compete with Disney 's current offer. Comcast didn't waste any time, announcing a $65 billion bid today -- 19% higher than Disney's offer.

Elsewhere in the telecom sector, T-Mobile (NASDAQ: TMUS) is looking to merge with Sprint (NYSE: S) in a deal that investors are already skeptical about, precisely due to expectations of heightened regulatory scrutiny. Shares of both wireless carriers gained modestly in trading today. However, while the odds of getting approval may have slightly improved , the overall chances are still slim.

Interior of a T-Mobile retail store in New York City

Image source: T-Mobile.

This horizontal merger could still go sideways

The biggest distinction between the two deals is that one is a horizontal merger (T-Mobile-Sprint), while the other is a vertical merger (AT&T-Time Warner).

In a vertical merger, a company is looking to vertically integrate parts of the value chain, such as acquiring a critical supplier for some raw input used by a manufacturer. Since separate companies have their discrete own profit and value creation motives, vertical mergers can allow the acquiring company to save on costs, effectively capturing those value creation operations for itself. The company can then choose whether or not to keep those savings for itself, pass them along to consumers in the form of lower prices, or some combination of both. In this case, AT&T is effectively a distributor of content, with Time Warner supplying that content.

In a horizontal merger, a company attempts to acquire a direct competitor that is competing on the same playing field. Horizontal mergers are often motivated by cost savings as well, but these savings are usually the result of achieving greater scale, as well as eliminating any redundant overhead. The inevitable result of a horizontal merger is that the combined company is able to grab more market share, which is precisely where antitrust concerns come in. Eliminating a direct competitor fundamentally reduces competition, which has far greater potential to harm consumers.

This is why the Department of Justice universally scrutinizes horizontal mergers much more closely, including calculating a Herfindahl-Hirschman Index (HHI) that quantifies the impact on market concentration. Small companies merging in an unconcentrated market are less of a risk to consumers than two major players merging in an oligopolistic market. The T-Mobile-Sprint merger still faces an uphill battle.

10 stocks we like better than T-Mobile US
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and T-Mobile US wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Evan Niu, CFA owns shares of DIS. The Motley Fool owns shares of and recommends DIS. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: TMUS , S , T

More from Motley Fool


Motley Fool

Motley Fool

Market News, Investing

Research Brokers before you trade

Want to trade FX?