It looks like the M&A wave is continuing, with the report this morning in the Wall Street Journal that Dish Network (DISH) and T-Mobile USA (TMUS) are in discussions to merge. "Discussions" means they are attempting to hammer out a deal; there are scant details, and there is a possibility, no matter how remote, those talks could collapse with nothing done. Let the failed merger between Comcast (CMCSA) and Time Warner Cable (TWC) serve as a reminder that just because two companies are talking, for various reasons a transaction may not occur.
If consummated, the merger would continue the wave of telecom deals over the last several months that has included AT&T's (T) $49 billion deal for DirecTV (DTV) and Charter Communications' (CHTR) announced total of $67 billion in deals that would roll up Time Warner Cable and Bright House Networks to create the second-largest U.S. cable operator. Continued success for investment bankers who would stand to collect a slew of fees, but when we really think about it, what other choice did these two companies have?
T-Mobile USA is the fourth largest wireless carrier, and Dish is the country's second largest satellite TV operator. Neither is exactly the best of breed or the pole position leader in their respective industries. If we look at the shifting landscape in which their competitors, such as AT&T, Verizon Communications (VZ), and Comcast have been offering telephony, entertainment, mobile and high speed Internet, T-Mobile US and Dish were akin to the stragglers at a near ending game of musical chairs. It's looking like Sprint (S) could be the lone player standing when the music stops.
As I said a few weeks ago on the news that Charter Communications was pursuing Time Warner Cable, this potential Dish combination with T-Mobile US smells of desperation. Should the deal be consummated, what's the competitive differentiation between the offerings from AT&T, Verizon and Comcast? Most likely price, and as we've seen time and time again, that is a disastrous strategy for margins and earnings.
That's even before we consider the effect of over the top programming, like Hulu, streaming services like those from Amazon (AMZN), Netflix (NFLX) and others like Apple's (AAPL) existing iTunes catalog or the much-rumored streaming TV service.
What does it say about their strategy to combine at a time when consumers are looking to cut cords? While the strategy behind a T-Mobile US-Dish deal may have been ideal several years ago, in today's world of the Always On, Always Connected consumer living in a content-driven world, how would the new company build a competitive moat around its services? I'm far more intrigued by the move by John Malone to use Lions Gate (LGF) to consolidate programming companies.
Taking a page from what I usually say about the consumer electronics industry, the lion's share of market share tends to consolidate around the top three players, with something slightly bigger than crumbs falling to the other players. We also know that more often than not mergers between companies of this size tend not to realize all the synergies and promises the management team gushes over when selling the deal. More reasons to be skeptical.
For those investors wondering what to do, I have two suggestions. First, stick with the best-of-breed companies that are offering services that consumers want. Second, if we've learned anything from Netflix aside from streaming is the modality that consumers want, it's also that content is king. Disney (DIS) shares are a strong testament to that, and they've been a great performer with more to go (Frozen 2, Star Wars and the ongoing Marvel slate of films) compared to DISH shares.