Mergers always stir the pot, and it is not just for the employees and customers involved in the deal. Vendors also see significant turbulence in the wake of industry consolidation. With AT&T (NYSE:T) announcing its intention to acquire T-Mobile, there will almost certainly be some changes in the telecomm equipment space.
These two companies spent nearly $11 billion combined on capital expenditures in 2010 - close to half of the North American total. It seems unlikely that AT&T's ongoing spending needs will be as simple as "one plus one" in the future, as the company will likely see some benefit of scale and elimination of redundancies. In other words, by AT&T getting larger, the total opportunity for telecomm equipment vendors may get a bit smaller.
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To a certain extent, AT&T's capital expenditure plans are not going to radically change with the addition of T-Mobile. The company will continue to roll out its 4G network and will not be supporting or operating the T-Mobile network as a separate unit. That said, with more customers now under its umbrella, it stands to reason that AT&T will have to increase its overall capital expenditures (though again, not as much as simply adding T-Mobile's prior spending might suggest).
Alcatel Lucent (NYSE:ALU) and Ericsson (Nasdaq:ERIC) are two of AT&T's largest equipment vendors and there is no reason to expect this to change. More to the point, these two companies have each won about half of AT&T's 4G build orders and a larger AT&T should translate into larger overall orders.
Likewise, Ciena (Nasdaq:CIEN) and Adtran (Nasdaq:ADTN) count AT&T as meaningful customers, but not T-Mobile. So too with Sierra Wireless (Nasdaq:SWIR), which does not count T-Mobile as a major revenue contributor.
The T-Mobile Dimension
If T-Mobile goes away, that will be bad news for Nokia Siemens, as T-Mobile was a major customer and AT&T does not do all that much business with the company. This will not be a great development for Nokia (NYSE:NOK) or Siemens (NYSE:SI), then, but the joint venture does have other clients like Telefonica (NYSE:TEF) and sizable shares in emerging markets like India.
For Ericsson and Amdocs (NYSE:DOX), the picture is less clear. On one hand, Ericsson and Amdocs both had business with T-Mobile. On the other, both also have substantial business with AT&T (AT&T was 29% of Amdocs' revenue-base in 2010). There will be some risk in transition, then, and some risk to lower overall spending totals, but the deal should not be too problematic.
The story gets even murkier with Powerwave (Nasdaq:PWAV). This smaller player has made a solid rebound and has interesting prospects in its own right, but it is a little challenging to see how this deal will shake out for the company. On one hand, the company has been seeing more demand from end-user customers (Powerwave has traditionally sold mostly to OEMs) and AT&T is becoming more and more significant. On the other hand, Nokia Siemens is about one-quarter of the company's revenue and it is hard to imagine there will not be some impact there.
Also Good For Smartphones
T-Mobile had not done a great job of linking itself to hot smartphones. Not only had the company tried intermittently to position itself as something of a value player, but the company's lagging subscriber base made it a less appealing partner for exclusive launches. Bringing over 30 million subs into the AT&T fold, though, gives a lot more exposure to the high-end phones sold by Apple (Nasdaq:AAPL), Motorola Mobility (NYSE:MMI) and Research In Motion (Nasdaq:RIMM), assuming that AT&T holds on to the higher-spending T-Mobile customers (and/or upsells the remainder).
The Bottom Line
Given AT&T's initial guidance, it looks like this deal will only expand their capital expenditures by about one-third to one-half of the prior T-Mobile level. That contraction, then, is not good news for the equipment sector as a whole and especially those vendors like Nokia Siemens that had sizable business with T-Mobile and little (if any) offsetting business with AT&T. Longer term, the deal will also be negative for the sector in that it eliminates one more buyer and gives the surviving players more leverage.That said, communications equipment is very much a growing business around the globe and investors should not overact to this one large transaction. (For more, see Dial Up Choice Telecom Stocks.)
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