Fewer Choices for Wireless Customers
Verizon recently reached an agreement to purchase the nation's fifth-largest wireless carrier, Alltel Wireless, for $28.1 billion. The deal is significant for a number of reasons. The most obvious is that Verizon becomes the nation's largest cellular network operator -- folks do place importance on that rating. After adding Alltel's 13 million customers to its ranks, Verizon will have the most subscribers in the United States, around 80 million, and bragging rights in the incessant commercials touting wireless services. AT&T had been the market leader since its merger with Cingular in 2004 and currently has an estimated 71 million subscribers.
The merger makes sense on several business fronts. The companies serve different geographic areas. Verizon has made its mark largely in urban areas in the Northeast and East. Based in Little Rock, Ark., Alltel's footprint touches 34 different states, with most of its success concentrated in rural areas in the Southeast, Midwest, and Southwest.
Technologically, the two companies' networks mesh well. Verizon and Alltel both currently use the Code Division Multiple Access (CDMA) standard to deliver their 3G wireless services, and both have been planning to switch over to the Global System for Mobile Communications (GSM) based Long Term Evolution (LTE) for their 4G networks.
The deal should have some financial perks. Verizon has been an efficient wireless operator and can streamline Alltel's modus operandi. Carriers pay each other money whenever their customers use another competitor's network -- the roaming charge. Verizon's payments to Alltel are in hundreds of millions of dollars range and now that money stays in house.
However, there are potential bugaboos in the transaction. The reality is the two companies have not been friendly. In January, Verizon filed a false advertising lawsuit against Alltel. The lawsuit claimed that Alltel falsely represented its position as the only carrier to allow customers to alter their service plans without lengthening the terms of their contract. Verizon had changed its policy in October 2007 to permit customers to change their plans without penalty. Alltel eventually changed the ad, but Verizon contended that alteration came late.
Alltel has been struggling in the highly competitive wireless market. In November 2007, the carrier was purchased by turnaround specialists, GS Capital Partners and an affiliate of TPG Capital, for $27.5 billion. Underscoring the highly volatile nature of the wireless market, Verizon's $28.1 billion purchase price represents a $600 million increase for Alltel's equity investors in the past eight months -- perhaps Verizon paid too much?
Also, Alltel has been carrying a lot of debt. As part of the transaction, Verizon Wireless will assume $22.2 billion in outstanding debt. Taking money to write down those loans could hamper the company's ability to invest in its 4G expansion as well as other programs, such as its fiber-to-the home FiOS initiative.
Then there are the inevitable management challenges. Scott Ford, Alltel president and CEO, will continue in his current position as head of Alltel until the merger is completed. Eventually, many Verizon executives will be taking the jobs of Alltel managers, and such transitions rarely proceed smoothly.
Verizon hopes to complete its Alltel acquisition by year's end, but the deal is subject to regulatory approval at both the local and the federal levels. How smoothly that process will be is unclear, but it is likely that Verizon will have to divest some of its assets in markets where the two companies offer overlapping services.
The transaction strengthens Verizon and provides Alltel with a market exit, but doesn't help smaller businesses. The wireless market is consolidating around a few dominant players, and a lack of competition inevitably helps vendors, not customers. Further consolidation is probable. Sprint has been struggling lately, and there have been reports that Deutsche Telekom (T-Mobile) may acquire it. Most of the companies left, such as Centennial and Cincinnati Bell, Leap Wireless, MetroPCS, and U.S. Cellular, have regional focus and aren't really in a position to present a significant challenge to Verizon or AT&T. Chances are that AT&T is looking at those companies with the goal of trying to regain its No. 1 position. While watching the competition unfold can be entertaining, the market evolution hurts rather than helps small and midsize businesses.