Breaking Up Is Hard To Do, But So Is Merging

Deals such as the proposed Orange/T-Mobile combination typically look very attractive on paper. But in practice they pose as many risks of damage to the partners as promises of a stronger, more profitable market position.

The risks of the proposed Orange/T-Mobile deal are multiple, including in particular: 1. A prolonged period of uncertainty, which can cause staff in both companies at many levels (Who will be in charge of what? How many layoffs will occur?)  to take their eyes off customers and the market, creating openings that competitors will be quick to exploit; 2. Operational dislocations if the two companies' various systems do not work well together; 3. Disruptions in relationships with key vendors who will be jockeying for position to maximize their share of revenues in the new procurement environment. The need for regulatory approval and the potential for appeals against the regulators' decisions (the European Commission as well as the U.K.'s Ofcom are involved) can prolong the period of uncertainty. During this period each company may be reluctant to make too much progress towards post-combination integration in case competitively valuable information has to be exchanged that could be used against them if the deal eventually falls through. Admittedly this combination has fewer complications and potential regulatory implications than deals that either Vodafone or O2(Telefonica)  might make with T-Mobile in the U.K. The owners of both these other operators compete more broadly and directly with T-Mobile in its home base of Germany and some Eastern Europe countries than does Orange (France Telecom). Of course the potential benefits of the Orange/T-Mobile combination in the U.K., which are naturally emphasized in some quarters, include cost savings through consolidation and sharing of infrastructure, greater economies of scale in operations, and increased influence over market pricing and suppliers of network equipment and terminals. If these benefits are successfully achieved, then this initiative may give pause to regulators in other countries (since the U.K. market may then end up with effectively three mobile network operators (instead of the five now presently operating) if the existing relationship between T-Mobile U.K. and 3 is later extended into the proposed Orange/T-Mobile JV) who are contemplating how to attribute new spectrum so as to increase the number of mobile competitors in their markets to say 5 or 6. Economic, wireless engineering, and commercial realities may make this goal unrealistic, so means other than the introduction of  additional competitors will have to be found to ensure that  competition in mobile markets becomes or remains strong. For now Vodafone and O2 should find many ways via regulatory submissions, marketing campaigns, and other tactics to maximize uncertainty about the outcome of the proposed JV and to try to lure T-Mobile U.K.'s customers away to their services.