By Jack Yoest
The purpose of business is to make a profit, Economic Nobel Laureate Milton Friedman wrote in 1970. Is he right? Should shareholders’ interests ever be subordinate to the common good of stakeholders?
These are no longer academic questions as the recent direction of telecommunication mergers affecting the public, suppliers, customers, and distributors highlights. For example, in 2020, U.S. telecom giant T-Mobile merged with Sprint for $26 billion, with a profit-maximizing, Friedman-esque motive of overtaking competitors including AT&T and Verizon. However, as the negative impacts of combining the country’s third and fourth largest wireless communications companies have become more clear and new facts have come to light, a discussion about potential corrective actions has started anew.
The merger was not an overnight business deal. T-Mobile first announced its plans to acquire Sprint in April 2018, which drew widespread criticism from stakeholders, citing the potential loss of jobs, decreased competition, and even national security and critical infrastructural concerns. Despite these misgivings, a majority of Federal Communications Commission (FCC) commissioners announced in favor of the merger on May 20, 2019.
But just two days after that, the Washington Post reported that “Justice Department staff members who have been reviewing the proposed merger of T-Mobile and Sprint had recommended that the U.S. government sue to block the $26 billion deal, fearing the combination of the country’s third- and fourth-largest wireless carriers could threaten competition.” 14 state attorney generals both Democrats and Republicans from diverse areas as California, Washington D.C., New York, Texas, Virginia, ultimately took the lead and joined in filing a lawsuit to block the merger deal. Texas Attorney General Ken Paxton, for example, stated in a press release that “[T]he Texas Attorney General has an independent obligation to protect Texas consumers. After careful evaluation of the proposed merger and the settlement, we do not anticipate that the proposed new entrant will replace the competitive role of Sprint anytime soon.”
Undeterred by these concerns, the Department of Justice (DOJ) formally approved the deal by July 2019 and nearly a year later, on April 1, 2020, Sprint and T-Mobile officially completed their merger. Since then, the critics of the merger have unfortunately proven to be right as consumers have less options, bills have increased, and the quality of service has declined.
But arguably the most underdiscussed aspect of this contentious merger was its impact on small-to-medium business partners, dealers, and vendors who worked with the telecom heavyweights. Sprint and T-Mobile knew beforehand of the adverse effects that their merger could have on their smaller business partners and when concerns were raised, promises were made to these concerned parties that turned out to be hollow and unenforceable. A recent legal filing, for example, illustrates the questionable business practices Sprint and T-Mobile engaged in with a vendor called Wireless World. It is indicative of the ways this merger has been damaging to many of the new T-Mobile’s small business partners.
Wireless World had been an authorized dealer for Sprint since 2007 and one of its highest performers. In the runup to the merger, plans of which were allegedly concealed from small business partners, Wireless World claims it was encouraged to invest heavily in expansion. While this ostensibly helped maximize profits for Sprint and made it a more attractive takeover target, it left Wireless World in a difficult position. Assurances on news of the merger that Sprint would stay as a “stand-alone company” and that the new T-Mobile would only close 10% to 15% of its stores soon proved illusory.
T-Mobile initially ended up closing 33% of Wireless World stores, even after claiming that the company would be a “growth partner” and would be “well-taken care of.” Preexisitng contracts were soon nullified in favor of new “Agreement Packages” and within two years of the merger 83% of Wireless World stores had closed. In hindsight, it appears that Sprint deceived dealers for its own benefit and Wireless World now alleges it has ultimately suffered damages of well over $50 million.
Congressman and Chairman of the House Antitrust Subcommittee David Cicilline (D-RI) said in response to DOJ’s approval of the merger that the deal was “presumptively illegal” projecting exactly the downstream effects that materialized: “Both the original transaction and proposed settlement agreement raise the threat of higher phone bills, less choice, fewer jobs, and worse wages for hardworking Americans.” Ironically, then-CEO of Sprint Marcelo Claure told Congress under oath that “while most mergers do not create jobs. This merger is the opposite.” But maintaining such a promise is impossible when hundreds of small business partner stores that employ thousands are forced to close.
The merger of Sprint and T-Mobile may have followed Friedman’s admonition to maximize shareholder profit, but at great cost to their partner dealers. If left unchecked, this merger deal could set a dangerous precedent for giant corporations to pursue their own ends at the expense of smaller businesses and the integrity and common good of the American marketplace. Policymakers should act accordingly.
Jack Yoest is a leadership professor at The Catholic University of America and former Assistant Secretary for the Commonwealth of Virginia.