Integrative Case 3.4

The Antitrust Case on the AT&T-T Mobile Merger

Mike W. Peng

In 2011, the second-largest US mobile wireless carrier AT&T (with a 25% market share) proposed to merger with the fourth-largest carrier T-Mobile, which had a 15% market share and was a wholly owned subsidiary of Deutsch Telekom. Antitrust authorities blocked this merger. Why?

The Merger

In March 2011, Dallas-based AT&T announced that it had reached an agreement with Deutsch Telekom. (DT) to purchase DTs holy into US subsidiary, T-Mobile USA, four $39 billion. The tub for concentrations in mobile wireless telecommunication services in the US the counter for more than 90% of the market share. Of the big four, the second range AT&T had about 25% market share, and the fourth-ranked T-Mobile had 15%. The largest player was Verizon with 31%, and the third was Sprint Nextel at 20%. Although some small carriers competed in certain regions, no carriers other than the big four competed nationally. After the proposed merger, the combined AT&T and T-Mobile would become the nation’s largest wireless carrier, commanding more than 40% of market share, with 132 million customers and 72 billion in revenues. The scale and scope of the merger would require regulatory approval. AT&T indicated its willingness to sell off certain assets if necessary, and plan to complete merger in one year.

AT&T argued that the merger would allow AT&T to expand 4G LTE broadband to another 55 million Americans, reaching a total of 97% of the population and especially benefit in rural areas currently without broadband coverage. Because T-Mobile was losing money and suffering from its poor economies of scale, and it (and its parent company DT) had been unable to upgrade its networks and invest in 4G broadband. While AT&T was booming and adding customers, T-Mobile was losing customers- it was the only major carrier that did not offer the iPhone. But T-Mobile possessed some hard-to-substitute resources: spectrum. Spectrum represented finite resources auctioned by the federal communications commission (FCC). Exhausting its own spectrum, AT&T could benefit from tapping into T-Mobile’s underutilize spectrum. Accelerating 4G wireless deployment would not only generate new jobs due to AT&T’s own investment, but would also stimulate broader job creation and civil engagement due to better access to more affordable and more widespread wireless broadband services.

A variety of labor, environmental, and business groups supported the merger. These groups pointed to AT&T’s record and commitments to labor and environmental standards, and appreciated the investment and the jobs the merger would bring. Also, civil rights groups applauded the additional boost and civil engagement that could be facilitated by more widespread broadband. Governors of 26 states wrote letters to support the merger.

However, other diverse groups were opposed to this merger. Not surprisingly, Verizon and Sprint did not like the deal, because it would make them weaker. Sprint would become a distant third, so clearly it would not appreciate the outcome.  Verizon would lose its top position, but it would still be a strong player in a new duopoly. Internet companies did not like the merger either, because the merger would leave them with fewer service providers to negotiate with for getting their content and applications to customers. The computer and communication industry Association- which included eBay, Google, Microsoft, and Yahoo as its members- was opposed to the merger. Consumer groups argued that the merger would raise prices and stifle innovation by consolidating so much of the wireless industry in one firm.

On the core issue of whether increasing AT&T’s market power would hurt consumers, AT&T pointed out that the average inflation-adjusted price for wireless services in the United States fell by 50% from 1999 to 2009, according to the government accountability office. AT&T also argued that in many markets AT&T would still be competing with four or more rivals, so taking T-Mobile (which was losing customers anyway) out of the mix would not dent competition. If AT&T could not acquire T-Mobile (which had sizable infrastructure, such as cellular towers and significant spectrum), then AT&T might be forced to build its own infrastructure, which would be an unnecessarily costly undertaking and social waste, especially in crowded urban areas such as San Francisco. But even if AT&T went head-to-head with infrastructure building, it would still suffer from a shortage of spectrum, while T-Mobile, at the same time, could not fully utilize its spectrum- clearly a waste of finite resources.

The Antitrust Case

In August 2011, the US department of justice filed a lawsuit alleging that this merger would reduce competition and violate antitrust law. DOJ alleges that the “anticompetitive harm” of this merger would include:

(a) actual and potential competition between AT&T and T-Mobile would be of limited; (b) competition in general likely will be lessened substantially; (c) prices are likely to be higher than they otherwise would; (d) the quality and quantity of services are likely to be less than they otherwise would due to reduce incentives to invest in capacity and technology improvements; and (e) innovation and product variety likely will be reduced.

In particular, given T-Mobile’s positioning as a self-styled “ disruptive pricing” provider, “AT&T’s acquisition of T-Mobile,” alleged DOJ, “would eliminate the important price, quality, product variety, and innovation competition that an independent T-Mobile brings to the marketplace.” In addition, DOJ argued:

The substantial increase in concentration that would result from this merger, and the reduction in the number of nationwide providers from 4 to 3, likely will lead to lessened competition due to an enhanced risk of anticompetitive coordination. Certain aspects of mobile wireless communications services markets, including transparent pricing, little buyer-side market power, and high barriers to entry and expansion, make them particularly conductive to coordination.

In conclusion, DOJ argued that the proposed merger would violate section 7 of the Clayton act and that it should be stopped. In the lawsuit, DOJ also sued T-Mobile and DT as co-defendants. On behalf of the US government, DOJ was the sole plaintiff in its first complaint filed on August 31, 2011. In its first amended complaint filed on September 16, DOJ was joined by the states of New York, Washington, California, Illinois, Massachusetts, Ohio, and Pennsylvania as co-plaintiffs. And it’s second amended complaint filed on September 30, Puerto Rico joined as a co-plaintiff. The case was officially the United States et al. v. AT&T Inc. et al.

AT&T was not a stranger to antitrust lawsuits. Today’s AT&T is the direct result of the first United States vs AT&T antitrust lawsuit. Because of its monopoly and long-distance (land-line) telephone, the original AT&T (“Ma Bell”) was forced by DOJ to break up into Sevan regional bell operating companies (known as “Baby Bells”) in 1983. Between 1983 and 2005, today’s AT&T was one of these Baby Bells named Southwestern Bell Corporation between 1983 and 1995, and shortened to SBC between 1995 and 2005. Due to its successful market performance, SBC emerged as a leading offspring of the original AT&T (Verizon was another leading off-spring). In 2005, SBC spent $16 billion to purchase its former parent company, AT&T corporation- a Baby Bell acquiring Ma Bell. Quitting in the SBC name, the merged entity named itself AT&T Inc. and took on the iconic AT&T branding (including it’s logo and its stock ticker “T”, which simply sounds for “telephone”). Before the filing of the second United States versus AT&T case, the economist asked: “Could the bid for T-Mobile be a sign that monopoly Ma is trying to return from her grave?”

The Outcome

In November 2011, the FCC issued its opinion and joined DOJ in opposing the merger. In December 2011 (before the antitrust case went on trial), AT&T gave up the merger and DOJ dismissed the case. A triumphant DOJ announced:

Consumers won today… Had AT&T acquire T-Mobile, consumers in the wireless market place would have faced higher prices and reduce innovation. We sued to protect consumers who rely on competition in this important industry. With the parties’ abandonment, we achieved that result.

A frustrated AT&T noted in its press release:

[Dallas, Texas, December 19, 2011] AT&T Inc. (NYSE: T) said today bad after a thorough review of options it has agreed with Deutsch Telekom AG to end its bid to acquire T-Mobile USA, which began in March of this year.

The actions by the federal communications commission and the Department of Justice to block this transaction did not change the realities of the US wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to the spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.

“AT&T will continue to be aggressive in leading the mobile Internet revolution,” said Randall Stephenson, AT&T chairman and CEO. “Over the past four years we have invested more in our networks than any other US company. As a result, today we deliver best-in-class mobile broadband speeds- connecting smartphones, tablets, and emerging devices at a record pace- and we are well underway with our nationwide 4G LTE deployment.

“To meet the needs of our customers, we will continue to invest,” Stephenson said. “However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the US wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.

“ The mobile Internet is a dynamic industry that can be a critical driver in restoring American economic growth and job creation, but only if companies are allowed to react quickly to consumer needs and market forces’, Stephenson said.

The fine prints in the deal included DOJ’s blessing of AT&T and T-Mobile’s collaboration in roaming. The more significant (or, if you will, the more bizarre) outcome was that as per AT&T’s original deal with DT, in the event of merger failure, AT&T would pay T-Mobile $3 billion as a break-up fee and give T-Mobile $1 billion worth of AT&T-held wireless spectrum. In short, the US government reduced the competitiveness of a US firm by forcing a US firm to subsidize the wholly owned subsidiary of a foreign firm.

In the name of preserving (domestic) competition, the US government preserved a (foreign) competitor. “The problem is,” noted one expert at Slate, “ T-Mobile doesn’t want to be a competitor anymore. It’s parent company DT wants out of the US market.” As the weakest among the big four, T-Mobile only added 89,000 new customers between 2009 and 2011, while the industry took in 33 million new customers. By essentially giving up since March 2011, T-Mobile lost 467,000 lucrative contract customers during the merger process. By focusing on its terms of exit, T-Mobile turned its attention away from network upgrades and improvements. DOJ and FCC cannot force T-Mobile to be in business, just like no one can force customers to sign up for plans they do not want. By breathing a new lease on life into T-Mobile, that was exactly what DOJ and FCC did: forcing T-Mobile to be in business against its (and it’s parents company’s) own wishes. The same expert at Slate continued:

Sure, companies like T-Mobile and Sprint can offer cheaper plans, but the success of Verizon and AT&T shows price is not our primary concern when it comes to wireless service. We want shiny smartphones and big, powerful, reliable networks… Rather than stay for competition, the merger would have intensified the war between the two giants, AT&T and Verizon. And for those people for whom price is paramount, there would remain not only Sprint, but a slew of smaller, regional providers like Leap and MetroPCS.

In 150 words or more complete the following (use outside sources/ information if possible):

Defend AT&T’s position as its CEO.

Pastina Company sells various types of pasta to grocery chains as private label brands. The company's reporting year-end is December 31. The unadjusted trial balance as of December 31, 2021, appears below. Account Title Debits Credits Cash 31,400 Accounts receivable 40,200 Supplies 1,600 Inventory 60,200 Notes receivable 20,200 Interest receivable 0 Prepaid rent 1,000 Prepaid insurance 6,200 Office equipment 80,800 Accumulated depreciation 30,300 Accounts payable 31,200 Salaries payable 0 Notes payable 50,200 Interest payable 0 Deferred sales revenue 2,100 Common stock 61,400 Retained earnings 29,000 Dividends 4,200 Sales revenue 147,000 Interest revenue 0 Cost of goods sold 71,000 Salaries expense 19,000 Rent expense 11,100 Depreciation expense 0 Interest expense 0 Supplies expense 1,200 Insurance expense 0 Advertising expense 3,100 Totals 351,200 351,200 Information necessary to prepare the year-end adjusting entries appears below. Depreciation on the office equipment for the year is $10,100. Employee salaries are paid twice a month, on the 22nd for salaries earned from the 1st through the 15th, and on the 7th of the following month for salaries earned from the 16th through the end of the month. Salaries earned from December 16 through December 31, 2021, were $800. On October 1, 2021, Pastina borrowed $50,200 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years. On March 1, 2021, the company lent a supplier $20,200 and a note was signed requiring principal and interest at 8% to be paid on February 28, 2022. On April 1, 2021, the company paid an insurance company $6,200 for a one-year fire insurance policy. The entire $6,200 was debited to prepaid insurance. $500 of supplies remained on hand at December 31, 2021. A customer paid Pastina $2,100 in December for 800 pounds of spaghetti to be delivered in January 2022. Pastina credited deferred sales revenue. On December 1, 2021, $1,000 rent was paid to the owner of the building. The payment represented rent for December 2021 and January 2022 at $500 per month. The entire amount was debited to prepaid rent. Prepare an adjusted trial balance. (Do not round intermediate calculations. Round your final answers to nearest whole dollar.)

Pastina Company sells various types of pasta to grocery chains as private label brands. The company's reporting year-end is December 31. The unadjusted trial balance as of December 31, 2021, appears below.

Information necessary to prepare the year-end adjusting entries appears below.

1. Depreciation on the office equipment for the year is $10,900.
2. Employee salaries are paid twice a month, on the 22nd for salaries earned from the 1st through the 15th, and on the 7th of the following month for salaries earned from the 16th through the end of the month. Salaries earned from December 16 through December 31, 2021, were $1,200.
3. On October 1, 2021, Pastina borrowed $51,800 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years.
4. On March 1, 2021, the company lent a supplier $21,800 and a note was signed requiring principal and interest at 8% to be paid on February 28, 2022.
5. On April 1, 2021, the company paid an insurance company $7,800 for a one-year fire insurance policy. The entire $7,800 was debited to prepaid insurance.
6. $740 of supplies remained on hand at December 31, 2021.
7. A customer paid Pastina $2,900 in December for 1,200 pounds of spaghetti to be delivered in January 2022. Pastina credited deferred sales revenue.
8. On December 1, 2021, $1,800 rent was paid to the owner of the building. The payment represented rent for December 2021 and January 2022 at $900 per month. The entire amount was debited to prepaid rent.

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Problem 2-4 (Algo) Part 6

6. Prepare a post-closing trial balance

Allocating Selling and Administrative Expenses using Activity-Based Costing

Arctic Air Inc. manufactures cooling units for commercial buildings. The price and cost of goods sold for each unit are as follows:

In addition, the company incurs selling and administrative expenses of $226,250. The company wishes to assign these costs to its three major customers, Gough Industries, Breen Inc., and The Martin Group. These expenses are related to three major nonmanufacturing activities: customer service, project bidding, and engineering support. The engineering support is in the form of engineering changes that are placed by the customer to change the design of a product. The budgeted activity costs and activity bases associated with these activities are:

Activity-base usage and unit volume information for the three customers is as follows:

Required:

1. Determine the activity rates for each of the three nonmanufacturing activity pools. Round to the nearest whole dollar.

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and operating income associated with each customer.

Allocating Selling and Administrative Expenses using Activity-Based Costing

Shrute Inc. manufactures office copiers, which are sold to retailers. The price and cost of goods sold for each copier are as follows:

In addition, the company incurs selling and administrative expenses of $226,570. The company wishes to assign these costs to its three major retail customers, The Warehouse, Kosmo Co., and Supply Universe. These expenses are related to its three major nonmanufacturing activities: customer service, sales order processing, and advertising support. The advertising support is in the form of advertisements that are placed by Shrute Inc. to support the retailer's sale of Shrute copiers to consumers. The budgeted activity costs and activity bases associated with these activities are:

Activity-base usage and unit volume information for the three customers is as follows:

Required:

1. Determine the activity rates for each of the three nonmanufacturing activities. Round to the nearest whole dollar.

2. Determine the activity costs allocated to the three customers, using the activity rates in (1).

3. Construct customer profitability reports for the three customers, dated for the year ended December 31, using the activity costs in (2). The reports should disclose the gross profit and operating income associated with each customer.

Please identify the type of training evaluation used in each scenario. Your choices for each scenario are one of the four types of evaluation:

1. Results Evaluation;

2. Behavioral Evaluation;

3. Learning Evaluation;

4. Reaction Evaluation

A. A curator of a traveling new exhibit examines the wear on the new museum floor in the room where the exhibit is located to ascertain the popularity of the exhibit. What level of evaluation is this?

B. Rod goes through training on controlling his temper at work. After the training, Rod fills out a survey asking him how well the training has done in helping him control his temper. What level of training is this?

C. Rod goes through training on controlling his temper at work. After the training Rod fills out a survey presenting him with a number of scenarios on how a person might cope with situations that might lead to interpersonal conflicts. Rod had taken the same survey before the training. Rod demonstrated much more acceptably social behavior on the survey following the training. What level of training is this?

D. Rod goes through training on controlling his temper at work. Rod has had a number of run-ins with his peers leading to this training. This has led to poor performance appraisals for Rod in the area of interpersonal relations. After the training, Rod acts very differently at work toward his subordinates. In his next performance appraisal, Rod receives a great and much improved rating in the area of interpersonal relations. What level of training evaluation is this?

E. Rod goes through training on controlling his temper at work. Rod has had a number of run-ins with customers leading to this training. This has led to poor customer relations and a loss of sales for his company. After the training Rod acts very differently at work toward his customers and they are pleased to do business with him. The quarter following the training, Rod’s sales figures are way up from the quarter before the training. What level of training is this?

F. Rod goes through training on controlling his temper at work. Rod has had a number of run-ins with customers leading to this training. This has led to poor customer relations and a loss of sales for his company. After the training, in Rod’s opinion all his customers are now pleased to do business with him. What level of training is this?

QUESTION 6

1. An office manager is testing a new system that is intended to decrease the variance of the time customers wait before they relate to a service representative. Under the old system, a random sample of 18 customers had a variance of 250. Under the new system, a random sample of 9 customers had a standard deviation of 11. At α = 0.10, is there enough evidence to convince the manager that the new system has a lower variance? Assume both populations are normally distributed and randomly selected.

   1. What is the null hypotheses and alternative hypotheses: (2)
   2. What are the degrees of freedom for this distribution, what distribution are we going to use? (3)
   3. What I the critical value of this distribution: (1)
   4. What is the test statistic for out sample (2)
   5. Do we reject or accept the null hypotheses? Why? (2)

Customers arrive at a cafe every 2 minutes on average according to a Poisson process. There are 2 employees working at the bar providing customer service, i.e., one handling customer orders and another handling payments. It takes an average of 1 minute to complete each order (exponentially distributed). Based on the above:

f. What are the service time probability density and cumulative distribution functions?

g. What percentage of customer orders will be prepared in exactly 2 minutes?

h. What are the chances it will take between 3 and 4 minutes to prepare a customer’s order?

i. What is the average service rate for completing orders?

j. What is the average number of customers waiting to order?

k. What is the average number of customers at the cafe?

l. On average, how long does it take to serve a customer?

IncorrectQuestion 3

0 / 1 pts

Which of the following would represent the least likely use of an income statement prepared for a business enterprise?

Use by customers to determine a company's ability to provide needed goods and services.

Use by labor unions to examine earnings closely as a basis for salary discussions.

Use by government agencies to formulate tax and economic policy.

Use by investors interested in the financial position of the entity.

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?

Increase research and development activities.

Relax credit policies for customers.

Delay shipments to customers until after the end of the fiscal year.

Delay purchases from suppliers until after the end of the fiscal year.