You many have heard the news within the past week: there's a huge new deal brewing in the telecom world. Last week, telecom giant AT&T reached a $85.4 billion deal to buy media giant, Time Warner Cable and the reception has not been that great on both sides. The stocks of both companies dropped when the market opened after the deal was announced: Time Warner lost 3% and AT&T dropped 2%. Additionally, AT&T's stock dropped about 7% in the days leading up to the merger announcement.
Why did that happen?
Well, clearly the market just does not like a) the price that AT&T is willing to pay for a cable company, and b) the likelihood of this deal actually getting approved by regulators is slim-to-none.
A merger of this size will have to be approved by Congress and several U.S. bureaucracies, and the likelihood of that happening (in my opinion) is extremely low. Why? There are safeguards to protect Monopolies or Oligopolies from happening in the United States. No, a monopoly is not just a board game; it's a very serious problem for consumers and long-term market stability.
A monopoly (for a refresher) is when a company is so large that it completely controls the market of a particular industry because it has no competition whatsoever. An oligopoly is similar, but it consists of a small number of companies completely controlling a market. Competition is necessary for prices to be reasonable for consumers; they try to create the best value at the lowest possible price. If there is no competition, the company can charge whatever it wants and the consumer loses big time.
Telecom and media companies were once separate entities altogether - one controlled TV the other phone/internet. Consumers are moving away from paying for cable TV and are more likely to stream shows and movies over the internet in an effort to save money by not having to pay for channels they don't watch. While good in theory, this is opening a door for big mergers to start happening in order to make sure that "good deals" won't happen for consumers.
So should you invest in either of these companies? I wouldn't advise it. Although know that in retaliatory it is likely that Verizon (the larger telecom company) will likely try and purchase another media company to firmly ensure its place at the top. I don't like where all this is going, but just know that even in a market with 4 major mobile carriers - Verizon, AT&T, Sprint and T-Mobile - there is a lot of pricing concerns already. Imagine what would happen if there were only 1-2 companies controlling the market. Ugh.
Here is the 1-year performance of A&T (T) stock versus Time Warner Cable's (TWX):
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