AT&T's document does a poor job of arguing its case for a merger and contains numerous contradictions and curiosities.  (Source: Business Insider)

AT&T reports dumping 1.2 million documents on the Department of Justice, and likely a similar number on the FCC, in what can be viewed as somewhat of a "Chewbacca Defense" and an attempt to avoid answering actual tough questions regarding the merger.  (Source: South Park Studios/Comedy Central)

AT&T claims that it doesn't even communicate with local managers on ads and that some local managers don't even ever write down what their ad strategy is. Perhaps this explains those Luke Wilson ads?

The planned merger will lead to an estimated $10B USD reduction in spending -- and like a corresponding reduction in job creation. Layoffs at T-Mobile also remain an active possibility.  (Source: TFTS)
1.2 million dumped docs can't hide that the expensive deal looks like an attempt to stifle competition

AT&T, Inc.'s (T) management have found themselves playing the role of televangelists in recent months, trying to sell the credulous public -- and the government -- on why a merger with Deutsche Telekom AG's (ETR:DTE) T-Mobile USA will be a great thing.  

You could say they have a tough sell.  After all, just about three decades ago the government broke up American Telephone and Telegraph [source: AT&T], eliminating its monopoly grip on the market.  Now after a series of acquisitions, AT&T is poised to become, once more, the dominate player on the market and pare customers' choice down to three major offerings -- AT&T, Verizon Wireless (VZ), and Sprint Nextel Corp. (S).

I. AT&T Lets Slip "Confidential" Document

The preacher may have made their own job a bit tougher in this case, as a leaked "confidential" document filed by AT&T to the U.S. Federal Communications Commission has launched a firestorm of media scrutiny.

Wireless Week was the sole site to take note of the document, that briefly graced the FCC's site on Thursday (which the publication mistakenly labelled as "partially redacted", when in fact the mistakenly posted version contained no redactions, according to our dialogue with an AT&T spokesperson).  Sadly, Wireless Week neglected to post the ten "confidential" redacted portions of the document, the thirty four "highly confidential" redacted portions, or even a single one of these redacted portions in its entirety.  They did, however, take note of one interesting fact (which we'll discuss later).

And while Wireless Week may have missed a chance to fill the public in on more details of AT&T's secrets, they did bring scrutiny on this document, which ultimately may prove more important than whatever confidential information might have been inadvertently and briefly exposed.

After all, the document in its redacted form had plenty of juicy details of its own.  Technically, despite what some publications claim, the partially redacted form of the document was ostensibly intended for public consumption.  But AT&T probably hoped it would never receive this much attention and scrutiny.

Indeed, for almost two months it languished, largely overlooked on the website [PDF] of The National Exchange Carrier Association, Inc. (NECA), a wireless trade organization -- understandable, given that the number of non-industry players digging around NECA's web space are likely few.  

Now that document is in the spotlight and AT&T has some tough questions to answer.

II. AT&T: Wasting Taxpayer Dollars With Chewbacca Defense?

U.S. federal laws state that any mergers or acquisitions in the communications space must pass FCC and U.S. Department of Justice scrutiny.  The FCC approves of the transfer of spectrum licenses and communications authorizations, while the DOJ approves the corporate aspects of the merger.

You might expect this process to play out something like a professional presentation, in which AT&T presents an executive summary and then a concise collection of supporting documents to government regulators.  Certainly this approach would seemingly provide the most transparency, give government regulators the best perspective on the prospective deal, and save taxpayer dollars spent on analyzing the deal.

But AT&T appears to be going a decidedly different route, as documented in its letter to the FCC.  AT&T recalls, "1.2 million files were sent to the U.S. Department of Justice in response to its request for information."

Similarly, in the letter to the FCC, AT&T often avoided directly answering questions in a concise manner, rather opting to direct officials to a single ubiquitous ("Exhibit A") dump of documents.  This dump-truck of a directory was created using "key word searches of custodian files." (e.g. pg. 5, pg. 6)

The letter mentions nothing about the results of these "key word searches" being reviewed by human eyes -- in other words, AT&T is forcing the FCC and DOJ to do the heavy lifting here, combing through a virtual public-library worth of pages.  It's hard to escape the perception that AT&T just searched through their corporate database and dumped a bunch of documents on the FCC and DOJ, hoping to overwhelm its way to approval.  

In essence AT&T appears to be using a strategy somewhat comparable to the legendary "Chewbacca defense" to try to clear its merger's good name -- overwhelming the deciders with so much superfluous information they are forced to accept its logic.

While AT&T's public relations team would surely disagree with this characterization, it's certainly the impression one may come away with after carefully reading through this letter.

This is particularly troublesome as it appears to dodge some of the FCC's most direct and serious questions.  For example the FCC requests detailed information (such as data from market researchers) on how the merger will affect the price of wireless services in the U.S. AT&T's non-response (pg. 12-13) is to present the same dump truck of key word searched documents ("Exhibit A"), which it uses as its ambiguous "answer" to a whole host of other (important) questions.

And if AT&T is avoiding giving direct answers and is indeed hoping to bury the FCC and DOJ under an insurmountable mountain of paperwork in an effort to gain a lax review, it's not only wasting federal time and taxpayer dollars, it's also obstructing the FCC and DOJ from doing their federally legislated duty to preserve free competition in the market.

III. Company Admits Its Statements Were Speculative, Lack Thorough Review

Remember how AT&T CEO Randall Stephenson claimed that T-Mobile and AT&T were suffering from "underutilized" networks.  Turns out those statements were highly speculative and could be utterly incorrect.  Writes AT&T (pg. 8):

AT&T does not maintain in the ordinary course of business a nationwide list of all CMAs where its individual network is underutilized. With regard to the areas where AT&T's and T-Mobile USA's networks may be underutilized relative to each other, AT&T does not have this information on a CMA by CMA basis, nor does AT&T have engineering data that would provide this granular information for T-Mobile USA.

In other words, it has no comprehensive review to back its claims.  Rather, it claims that a handful of analysis in "select" CMAs (market regions) back its assertions of "underutilization".  

This would be akin to if a company told investors the company was profitable, but really had only determined that one retail location was turning a profit.  Clearly such results can be cherry-picked, and are hard to trust.  Even assuming zero bias, the data is almost useless to draw general conclusions and indicates AT&T's past claims were overreaching and speculative.

Stranger still, the company seems to contradict itself, later in the document, writing (pg. 23):

AT&T is providing Exhibits that contain information responsive to this request, consistent with its discussions with the Commission's staff. The .csv file in Exhibit 19-1 contains current (as of March 11, 2011) data usage for each UMTS site (by USID) measured in kilobytes, during the monthly busy hour, and separately for the uplink and the downlink. The .csv file in Exhibit 19-2 contains current (as of March 11, 2011) data usage for each GSM site, measured in Erlangs, combined for the uplink and downlink, for the monthly busy hour. At the Commission's request, AT&T also provides an estimate of GSM data usage in terms of Kilobytes, using a formula that converts Erlangs to Kilobytes. Both exhibits identify the CMA associated with each site.

In other words, AT&T previously said it doesn't collect utilization data on a local level, but here it says it is collecting usage data on a local level.  The only way this usage data couldn't be used to provide utilization tracking is if AT&T (nationally) is unaware of how much total capacity it has locally and thus is unaware of how much capacity is going unutilized.  This seems extreme hard to believe, and is alarming to investors, if true.

Again, AT&T PR will likely try to spin this in some positive direction, but it's hard to argue with AT&T's own lawyers -- the company either doesn't have the information to conclusively back one of its very significant claims about the merger or is making deliberately misleading statements.

IV. AT&T Claims It Hasn't Planned How It's Going to Integrate T-Mobile

In the "that's kind of hard to believe" department, AT&T's lawyers claim to the FCC that the company has no idea how it's going to integrate its $39B USD prospective purchase into the company and that it has formed no plans to that extent.

It writes (pg. 10):

AT&T will not be in a position to make any final determinations about possible changes in T-Mobile USA until it is able to obtain more detailed information about the operations of the company, which will occur later in the acquisition process. In addition, any preliminary plans are subject to the outcome of the regulatory process. AT&T has not yet begun detailed integration planning efforts.

It reasserts its lack of planning later on, stating (pg. 18):

AT&T has not yet begun detailed integration planning efforts relating to its marketing or advertising efforts or other operations.

It later essentially claims that T-Mobile hasn't given it enough information to make concrete integration plans, writing (pg. 32):

AT&T has not yet begun detailed integration planning and its knowledge of T-Mobile USA's operations is necessarily limited at this early stage. The actual process of determining which specific T-Mobile USA sites to integrate and which to decommission will require substantially more data from T-Mobile USA regarding its network as well as a more thorough engineering analysis of each area's characteristics and capacity needs, which could change by the time the Transaction closes. Consequently, AT&T has not yet determined the exact number or location of T-Mobile USA towers or other locations used for transmission of signals that will be integrated into the combined company's network to increase network density.

AT&T does refer to handful of details on possible high-level integration plans, but it is essentially refusing to provide the FCC with a comprehensive plan of how it's going to integrate T-Mobile.  While it's true that integration is dependent on restrictions the FCC may impose, should the deal be approved, it's hard to believe that AT&T doesn't have complete and detailed plans of how it hopes to execute its biggest acquisition and integration in recent history.

Either AT&T's investors should be pretty nervous at AT&T's lack of detailed analysis in such an important decision, or AT&T isn't being forthcoming and the FCC auditors should be pretty irate.

If AT&T is being honest here, if anything, it lends ammo to those who believe the acquisition is an effort to stifle competition.  After all, AT&T is saying it's not really sure how it's going to integrate T-Mobile; but left unsaid is the fact that what is sure is that the acquisition will mean one less would-be competitor on the market.

V. AT&T Claims Its National and Local Management Often Don't Communicate

As mentioned in our third section above, AT&T claimed that it couldn't comprehensively state where spectrum was underutilized as it collects no comprehensive information on regional spectrum usage.  Similarly, it claims its national operations doesn't keep track of or plan regional/local advertising campaigns.

It writes (pg. 17):

AT&T does not maintain a central repository of plans, analyses and reports concerning local or regional advertisements. As explained by David Christopher, Chief Marketing Officer of AT&T's Mobility and Consumer Markets, in his Declaration and Reply Declaration filed with the FCC, AT&T has given its 27 vice-presidents/general managers ("VP/GM") authority to respond to local competition by varying and supplementing national advertising to respond to local market conditions, and VP/GMs may develop customized marketing plans for use in particular cities or areas within their respective territories. Such local advertising plans, therefore, may not always be reduced to writing, and even when such records are created, they may not have been maintained for the periods covered by this request.

It's understandable that AT&T would delegate advertising and network analysis to regional management.  But to claim that regional managers and national managers never meet with each other or share information about advertising and network analysis is somewhat amazing.

Further, to claim that local managers may not even be committing their advertising plans to writing sounds a bit hard to believe.  If AT&T is being honest here, again, investors should be very concerned.  After all, it's essentially claiming that local managers are receiving no direction on several critical business aspects and national managers are receiving no feedback on those aspects.  And it's claiming that its regional managers are making major business decisions, in some cases, using no written documentation.

VI. Spending $39B USD for a $3.8B USD Infrastructure Upgrade

AT&T writes (pg. 40):

Prior to the merger, AT&T's plan was to deploy LTE to 80 percent of the U.S. population by the end of2013. However, because of the scale, spectrum, and other resources resulting from the transaction, AT&T is now able to commit to expand LTE to 97 percent of the U.S. population.

Going from covering 80 to over 97 percent of the population will require AT&T to almost triple the land mass covered by its LTE network, from below 20 percent of the United States to approximately 55 percent. Additionally, it costs nearly twice as much per covered person in capital expenditures to provide mobile wireless services to sparsely populated areas than to densely populated areas. AT&T estimates that this expansion would cost approximately [Begin Confidential Information] [End Confidential Information] in additional capital expenditures...

Expanded LTE coverage has been one of the key justifications for the merger.  Writes an AT&T spokesperson:

In addition to the LTE goal, our proposed merger will:
· Increase cell density and effectively double the amount of network traffic that can be carried using existing spectrum in the areas served by those cell sites.
· Gain the equivalent of 8 years of new site build based on 2010 build rates
· Improve voice and data network performance in areas of various markets in as little as nine months.

Now we've already shown that the claim that a merger would "effectively double the amount of network traffic that can be carried using existing spectrum in the areas served by those cell sites" is speculative and not necessarily true by AT&T's own admission.  So AT&T's justification basically boils down to that the merger will provide it with better 3G coverage and more LTE.  

Given this assumption, and the fact that the total merger costs are pegged at $39B USD, you would expect the projected cost of stand alone LTE deployment to be around half of the cost of the merger -- so around $20B USD.

Actually, according to the sole confidential data scooped by Wireless Week, it's $3.8B USD.  In other words, AT&T is gaining $34.2B USD worth of 3G.  Given that it's still going to have to fulfill T-Mobile USA customers' data and voice needs, it's likely not going to gain that much spare 3G.  So it's pretty difficult to believe that AT&T isn't getting a very bad deal here.

Unless, that is, AT&T's massive payout brings a certain unstated value -- say by eliminating one of the last two low priced competitors on the market.

It's easy to see why AT&T wanted to keep this figure a secret.  In this light the deal just doesn't make sense, unless you consider it a design to stifle competition.

AT&T's spokesperson insists that there's other benefits, but as we point out, some of these supposed benefits are contradicted by AT&T's own letter, and those that remain essentially don't seem to add up to the $34.2B USD outstanding cost of the acquisitions, after the LTE gain is considered.

VII. AT&T Claims That it Will Add Jobs, But Admits It Will Cut Spending

AT&T says the merger will create thousands of jobs, and the letter claims (pg. 46)  to provide supporting evidence of this, but still unexplained is how AT&T plans to do this, when it's going to make a net cut to T-Mobile's infrastructure spending.

The company told the public that the deal would lead to $8B USD in new infrastructure spending over the next six years.  However, it neglected to mention that by historical averages an independent T-Mobile USA would be spending $18B USD over this time period.  AT&T then turned to investors and bragged that the deal would deliver $10B USD in infrastructure cost savings -- essentially the missing T-Mobile infrastructure investment.

In short AT&T is cutting spending, not increasing it.  Some jobs may indeed be "created", but overall the net result will almost certainly be layoffs and/or reduced job creation.

VIII. Summary

A thorough analysis of the actual document in question gives the following impressions:
  1. AT&T is not providing the FCC and DOJ with neat, concise answers to all of their questions.  Much of it's "evidence" is a ubiquitous dataset ("Exhibit A"), which it has dumped on these agencies, leaving it to them to pay to sort through the mess.

  2. AT&T admits that some of the claimed benefits of the merger are speculative and thus not necessarily true.

  3. AT&T expects the public to believe it has no concrete plan on how it's going to execute the biggest, most expensive merger in its recent history.  It claims only to have vague "high-level" plans, the details of which it largely refuses to share with the public.

  4. AT&T claims it local and national management don't coordinate their efforts on many topics, yet it contradicts itself, revealing, seemingly, some of the information it claims doesn't exist likely does exist (CMA utilization).

  5. AT&T can't explain why it's willing to spend $39B USD on what amounts to a $3.8B USD LTE gain, and likely a similar several billion dollar 3G gain.

  6. AT&T's own figures point to reduced job creation as a direct result of the merger.
Add to the mix our previous research that most of the Congressional (House and Senate) supporters of the deal have accepted campaign donations from AT&T -- arguably payouts for support.  Obviously this both raises the price of the prospective deal even higher and brings its integrity into question.
In this light it's hard to view the merger as anything less than a pricey attempt to stifle competition.  AT&T may yet argue its case more eloquently, but this new document "redacted for public inspection" does a clumsy job in trying to convince the public of the merits of the deal.

It should be interesting how the FCC and DOJ react to this mess.

"A politician stumbles over himself... Then they pick it out. They edit it. He runs the clip, and then he makes a funny face, and the whole audience has a Pavlovian response." -- Joe Scarborough on John Stewart over Jim Cramer

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