Do Mergers Save Or Cost Consumers Money?

By Ryan C. Fuhrmann | April 05, 2011 AAA

In late March, telecommunications giant AT&T announced it would be acquiring T-Mobile to create the largest mobile phone company in the United States. The deal would consolidate the playing field from four to three, and leave Sprint a distant third, behind AT&T and Verizon. As such, there is much speculation that regulators could block the deal for stifling competition and putting too much power in only two firms. (This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions. See Trade Takeover Stocks With Merger Arbitrage.)

TUTORIAL: Retirement Planning

Is the Acquisition a Done Deal?
AT&T is pretty confident the deal will go through, and agreed to a rather large breakup fee of $3 billion if it doesn't clear antitrust hurdles. It is also touting to consumers and politicians that the move to expand its cellular network will bring the most advanced 4G mobile technology to all but 5% of U.S. citizens and rural markets that may currently be underserved by the largest players.

The company has also stated the merger will help it solve bandwidth issues by adding more network capacity that it can more efficiently combine with its existing network. It also thinks it can lower costs for its customers, or at least spread existing costs over a wider user base to lower average costs. Theoretically, this could help it further improve service and drive more efficiencies.

What Makes a Merger Work
Synergies, cost saving moves and other efficiencies are frequently cited as the motivation for most mergers. A number of studies have demonstrated that mergers don't work out very well for shareholders of the acquiring firm because companies almost always pay too much for what they receive. In other words, executive egos and bidding wars take priority over making sure a deal makes sense and the purchase price doesn't fully price in synergies and other merger benefits.

How Do Mergers Affect You?
In regard to the impact on consumers, the case can be made that most mergers are indeed beneficial and save them money in the long run. Bank mergers have created several money center banks, where customers can visit a branch nearly anywhere in the country and scale efficiencies mean the banks can lower transaction costs and pay competitive interest rates on bank deposits. Improved customer service and additional services, including insurance and investment options, have also been cited as benefits of consolidation.

Airline mergers have ensured that the industry remains solvent, and continues to offer a wide array of flight options for consumers. It is unlikely the larger players would have survived without a recent round of mergers between United and Continental, as well as Delta and Northwest. Many consumers complain about baggage fees and charges for in-flight meals and blankets, but they have helped keep individual ticket prices reasonable and add costs that are only paid by those that utilize a certain service, such as checking luggage.

The steady combination of domestic railroads also meant the industry was able to survive. There used to be too many railroad firms that made it uneconomical to afford the significant fixed costs that go into running and maintaining railroad track, cars, and locomotives. The industry now consists of only a few players and they have been able to offer shipping services to rival trucks and other forms of transport. Studies have detailed that mergers have meant railroads are more consistently on time and overall productivity has improved, which benefits end customers.

The fact remains that mergers are often necessary for industries to survive. There were hundreds of automobile firms in the early 1900s, and the industry steadily consolidated to three domestic firms today that are better able to spread heavy fixed costs and better compete with a steady onslaught of international rivals. (This corporate action can be profitable for investors who know what to look for. Read A Guide To Spotting A Reverse Merger.)

The Bottom Line
Overall, as long as competition isn't completely eliminated, mergers can make firms more efficient, and this can work to the benefit of underlying customers. In the industries cited above, fears abound that they have consolidated too much, but competition continually springs up to keep the larger firms honest. The mobile phone industry must compete with online services such as Skype, as well as prepaid rivals such as Boost Mobile. Airlines frequently see the start up of regional rivals, or other start-up airlines that boast low costs. Railroads are difficult to replace, but will always have to deal with more convenient and plentiful trucking firms. It may also make sense that consolidation is necessary for survival in capital intensive businesses where firms must spend billions of dollars to remain competitive.

The telecommunications industry is no exception, and the merger between AT&T and T-Mobile should ensure that the new, larger firm, can continue to invest the necessary sums to offer customers the fastest mobile phone service possible. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)

You May Also Like

Related Articles
  1. Stock Analysis

    Breaking Down the Halliburton Baker ...

  2. Retirement

    Know The Cost of Living Where You Plan ...

  3. Brokers

    Key Differences Between M&A Advisors ...

  4. Lifestyle inflation occurs when 'you earn more, you spend more', and your spending ends up matching your earnings. Thus, no savings remain.
    Budgeting

    Failing To Build Wealth Despite Making ...

  5. Trading Strategies

    Selecting Mergers & Acquisitions Advisories ...

Trading Center