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Merger Hype Is an Awful Reason to Consider Buying T-Mobile Stock

Josh Enomoto

T-Mobile (NASDAQ:TMUS) wants in on the M&A action with their proposed buyout of struggling outfit Sprint Corp (NYSE:S). But what will this likely mean for T-Mobile stock and the underlining telecom sector?

The telecommunications industry has made serious waves recently, with notably the AT&T Inc. (NYSE:TTime Warner deal providing the biggest fireworks.

The T-Mobile Stock Deal

Announced in April, T-Mobile is currently offering $146 billion in an all-stock deal for Sprint. On surface level, the merger would allow the combined unit to put up a viable front against mobile-carrier leaders AT&T and Verizon (NYSE:VZ).

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Despite the number of major competitors shrinking from four to three, proponents argue that the move would create meaningful competition.

That’s the theory, anyways. But the reality is that the mobile sector will have fewer players, and that puts us a step closer to monopoly territory.

Of course, that’s exactly what regulators fear, and their concerns can’t be ignored. T-Mobile likely won’t benefit from merely announcing their intent; they must bring home the goods.

Moreover, critics counter that reduced competition threatens innovation, and the desire to compete on price, something that has benefited customers.

For instance, mobile laggard Sprint has adopted (or resorted to, depending on your perspective) to price-slashing and other incentives. That necessarily forces competitors to respond, often directly with lower prices of their own.

Of course, T-Mobile isn’t exempt by any stretch from these reactionary measures.

The bitter back-and-forth may frustrate management, and wreak havoc on T-Mobile stock, but the industry reaches the ultimate end-goal: customers win.

T-Mobile CEO John Legere counters that giants AT&T and Verizon can stuff the “little guys” in the status quo. With a combined entity, competition and value for the customer should increase.

So who’s right?

T-Mobile Stock Faces Uphill Challenges

In my opinion, it’s impossible to determine the consensus view on T-Mobile’s proposal, and how it might impact T-Mobile.

Legere does have a point in that it’s difficult for either T-Mobile or Sprint to individually challenge the two stalwarts. A merger will immediately boost credibility and force AT&T and Verizon to compete more aggressively.

Again, in this scenario, the net translation amounts to a big win for customers.

More importantly, the next-generation 5G network rollout adds a complex variable to the merger debate. On its own, Sprint faces severe challenges to develop comprehensive 5G.

But through joining forces with T-Mobile, their corresponding spectrum holdings naturally results in a very credible threat.

At that point, the telecom behemoths can’t rely on the status quo; they must roll up their sleeves and respond.

On another positive note for the merger, proponents state convincingly that shutting down the deal won’t guarantee robust competition.

Because the reality is that, fundamentally, Sprint is a deeply flawed organization.

True, I did make a speculative call for Spring stock back in late February, and despite recent volatility, I’m still up on that risky idea.

But a successful trade on Sprint doesn’t change the fact that it’s troubled. They could easily collapse, and we’d have that fewer-competitors scenario all over again.

But the deciding factor for T-Mobile could come down to whether mergers are truly customer friendly.

Detailed research from Justin Pierce of the Federal Reserve Board of Governors and Bruce Blonigen from the University of Oregon indicates that mergers are only beneficial to affected companies.

In terms of economic efficiency – that is, forcing competitors to find the most ideal pricing balance – mergers are ineffective.

Pierce and Blonigen fewer competitors likely lead to higher prices, an obvious negative for customers.

Investors Remain Leery

Overall, the markets have responded to T-Mobile stock with unconvincing and choppy trades. On a year-to-date basis, shares are down more than 6%. It’s hard to see where shares go from here given the legal battles ahead.

What’s easier to predict is Sprint stock. Should the deal go through, Sprint is the biggest benefactor.

Its chief executive Marcelo Claure admits as such, stating during a Senate antitrust committee that “Sprint as a standalone company cannot fully seize the tremendous opportunity that 5G creates.”

Therefore, if you really want to engage this news, Sprint shares offer a speculative, but viable play.

On the other hand, I consider T-Mobile stock too risky. I’m not bearish on the investment, but it’s enjoyed a tremendous run-up since early 2016. With so many uncertainties of this proposal, I’d stay on the sidelines.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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