Sprint, T-Mobile Merger Win Could Bolster Struggling Firm Defense

The role that Sprint’s financial struggles and grim prospects played in court approval of its $26 billion merger with T-Mobile could prompt other companies to use a similar defense against antitrust claims.

Sprint’s more than $40 billion in debt and declining revenue were cited as a one reason why U.S. District Judge Victor Marrero on Tuesday rejected a lawsuit from several states that sought to block the telecom deal with T-Mobile.

In advocating for a merger, companies sometimes reference their poor finances through a failing firm defense and other similar pleas stating that a deal is necessary to prevent it from going under. Such defenses are rarely credited by regulators and courts because the deal would otherwise be anticompetitive.

Marrero’s citing of Sprint’s poor financial outlook as a partial reason to dismiss the states’ antitrust suit could be a defense more deal-seeking companies turn to, according to Sally Hubbard, director of enforcement strategy at Open Markets Institute in Washington.

This case “could certainly embolden merging companies” to make similar financial pleas, she said.

New York, California, and about a dozen other states argued that the deal would raise prices and harm consumers and that Sprint, despite its bad finances, would thrive without the T-Mobile deal.

Marrero cited Sprint’s “poor network quality” and numerous financial constraints in rejecting those arguments. “Sprint does not have a substantial long-term competitive strategy and will in fact cease to be a truly national” mobile network operator, the 173-page ruling said.

The Department of Justice, which approved the telecom deal in July, didn’t cite Sprint’s financial problems as a reason for green lighting the transaction.

“If I was a company interested in doing M&A deals in the future, I would be pretty happy with that part of the ruling” said John Newman, a former DOJ antitrust attorney who now teaches at the University of Miami School of Law.

“What company hasn’t had period of profitability, followed by periods of unprofitability, and if that’s enough to make out a defense, it could erode merger law,” Newman added.

Rare Exception

Federal antitrust regulators at both the DOJ and the Federal Trade Commission rarely give credit to a firm’s financial struggles as a reason why a deal should proceed.

For such a defense to work, companies have to meet fairly stringent standards, including proving that it’s in imminent danger of failure and in some cases proving that it couldn’t reorganize successfully in bankruptcy.

In corporate filings and during court proceedings, Sprint said it would be impossible to invest in a next-generation 5G network given continuous revenue drops as customers flee its networks.

Former Sprint Chief Executive Officer Marcelo Claure testified during the merger trial in the U.S. District Court for the Southern District of New York that a deal with T-Mobile wasn’t necessary for the company’s survival. But Sprint would likely have to borrow money and raise prices, Claure said.

Can’t Ignore

Struggling merger defenses are rarely accepted by the courts, Marrero said in citing only a handful of antitrust cases, some of which date back several decades, most notably the DOJ’s 1973 case against aerospace and defense company General Dynamics Corp.

Sprint’s deal with T-Mobile “nonetheless presents a rare case,” Marrero said.

Sprint’s poor financial position make it less likely it will invest in network upgrades and the carrier has lost about 6 million customers per year, “which is highly concerning,” Marrero said.

Marrero’s decision will likely compel the DOJ and the FTC to think about the impact of a company’s finances in their merger-review process, Joel Mitnick, an antitrust partner at Cadwalader, Wickersham & Taft LLP, said.

Merging companies will likely cite the Sprint, T-Mobile decision more when they argue in front of the DOJ and the FTC, he added.

“I think the agencies are going to have to factor that in if they bring a case, they are going to have to contend with this defense,” he said.

The case is State of New York v. Deutsche Telekom AG, S.D.N.Y., No. 1:19-cv-05434