AT&T's failed bid for T-Mobile could impact equipment sales at other firms

AT&T dropped its bid this week for rival telecommunications company T-Mobile USA. The move will have far-reaching consequences, and could impact other businesses.

After running into a regulatory battle with the federal government over its proposed acquisition of T-Mobile, AT&T ultimately decided to abandon the deal. The company argued its purchase of the rival mobile and telecomm provider would benefit consumers, as it would enhance its cellular network in the short-term.

Moreover, AT&T officials asserted the proposed deal would enable the company to avoid the regulatory red tape that many transmission and distribution line projects encounter. By buying T-Mobile, AT&T would have access to its nation-wide cellular tower portfolio, circumventing such issues.

Still, federal regulators were loath to accept the terms of the deal, and the Justice Department issued a report that was highly critical of the merger. The draft report – though not a formal ruling – effectively prompted AT&T to discard plans to absorb T-Mobile.

Reuters reports by abandoning the deal, AT&T also inadvertently affected companies operating in a number of other sectors. Equipment makers, for example, stand to benefit from the government's opposition to the merger. Analysts contended both companies scaled back their spending on coverage networks during the fourth fiscal quarter as they implemented business cost reduction measures as they endeavored to push through the merger.

By reworking spend management and reducing its investment in equipment, AT&T strived to convince lawmakers to approve the deal, according to Jefferies analyst George Notter.

"We believe that AT&T - in recent months - had significantly dialed back Q4 spending in order to apply leverage in its fight with regulators," he said.

The failure of the deal to pass the government's regulatory approval process will benefit equipment makers in the first half of 2012, Notter contended. He said that AT&T is expected to significantly ratchet up investment into such products as it works to expand its network without the use of T-Mobile.

AT&T's strategic sourcing of wireless technologies will benefit some companies directly, and others indirectly. Cisco, F5 and Juniper, for example, are not directly exposed to AT&T wireless expenditures. However, they manufacturers the software that comprises such products, and they are poised to benefit from the failed merger. Other firms that will benefit directly include Ericsson and Alcatel-Lucent, which provide AT&T with 4G base station systems, Barclays Capital analyst Jeff Kvaal said.

Barron's Tech Trader Daily Blog reports that AT&T's decision to abandon its pursuit of T-Mobile prompted a number of analysts – including Morgan Stanley communications equipment analysis Ehud Gelblum - to revise their formerly negative outlooks on equipment makers.

"With the T/TMO deal now officially called off, we believe a major overhang to spending is removed and sentiment in the group could quickly turn positive," Gelblum wrote in a research note. "Therefore … we now believe names exposed to AT&T such as Overweight-rated Juniper Networks, Adtran and Equal Weight-rated Ciena, could rally into earnings as money pours into the sector on the hope that spending resumes sooner than it would have."

While Gelblum is still cautious about prospects for equipment makers, he affirmed the failure of the T-Mobile deal should reinvigorate AT&T's purchasing services, as the company endeavors to increase the efficiency and speed of its 3G and 4G wireless networks.

Still, some experts erred on the side of caution in their assessment of whether AT&T would significantly rework spend management. UBS analyst Nikos Theosopoulos asserted that the $3 billion fee AT&T must pay to T-Mobile as a part of a deal the company brokered with the government could stymie the company's efforts to augment equipment investment.

Nonetheless, he struck an optimistic assessment – albeit one laced with a healthy dose of cynicism – regarding the outlook for equipment makers. He noted investment by both T-Mobile and AT&T had been so limited, it was unlikely it could further drop.