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Corporate Mergers: How Big Is Too Big?

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While mergers between utilities are typically successful, similar deals in other industries tend to disappoint. That checkered past is worth keeping in mind, as the flow of new deals appears to be ramping up.

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The number of Americans using prepaid wireless service rose by 11% in the second quarter. That's against a boost of just 1.1% in total contract customers nationwide. And T-Mobile USA's own contract customer base continues to drop, with half a million more leaving in the second quarter, which is a rate of 2.2% per month.

The fact that a T-Mobile USA/MetroPCS merger would control 18.4 million of the country's 74.5 million prepaid users shouldn't attract too much scrutiny either. In fact, the new entity would not even be the biggest prepaid service provider. And the FCC is also likely to view the deal favorably because it strengthens the fourth-largest wireless company at a time when unmatched scale and financial power are rapidly widening the gap between AT&T/Verizon and the rest of the US communications services sector.

The FCC isn't expected to rule on the deal until next year, which effectively defers the decision until the next administration. But based on the comments of industry executives in the wake of the announcement, investors should expect to see more deals in the coming months, and possibly a lot more if Washington is perceived to be in an agreeable mood.

Of course, the loser in this is the No. 3 wireless carrier Sprint, which had been rumored to be preparing its own bid for MetroPCS. Such a deal would have added a fifth wireless technology to its network, further complicating a plan to bridge operating differences that continue to plague profitability. But not buying MetroPCS effectively leaves the company with few obvious ways to increase scale and improve competitiveness.

Will the new T-Mobile USA be able to compete in the long run against the Big 2? That remains to be seen, and the road ahead will not be easy, even with the firm's advantages in the prepaid market. One thing, however, is for certain: The combined entity is in much better shape to do so than either party would be on its own. And that's ultimately the key criterion for determining whether a merger is worthwhile. Bigger in this case is definitely not too big, at least from an investor standpoint.

Incidentally, that may not be the case for the proposed union of Airbus parent European Aeronautic Defence & Space Co (PINK:EADSY) with Britain's BAE Systems Plc (PINK:BAESY). Backers hope to create a company large enough to compete with American defense giants Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT). A larger entity would potentially come with such opportunities as cost cutting by eliminating redundancies, greater muscle to win contracts, a pooling of technological acumen, and a stronger balance sheet.
No positions in stocks mentioned.
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