AT&T's M&A Failure Is a Game Changer

NEW YORK (TheStreet) -- Make no mistake, the breakup of AT&T's (T) proposed $39 billion merger with T-Mobile USA is a game changer.

The failure of the deal is likely to change telecom industry dynamics so that margins are pressured by lower pricing and capital spending. At the same time, as if enough wasn't already going right for Apple (AAPL), the company looks primed for a windfall as use of its iPhone and iPad products proliferates, along with purchases from its App store.

"The fragmentation of the carrier universe is almost certainly a positive for handset makers and suppliers to the [wireless] industry," said Craig Moffett of Sanford Bernstein in December after the Department of Justice blocked AT&T's acquisition of T-Mobile, which would have been the biggest deal of 2011.

For AT&T, Verizon (VZ), Sprint (S) and T-Mobile, among others, the decision means that they may need to plow billions more into developing networks to handle smartphone data, instead of consolidating. Added choice among national carriers, lower data prices and improved coverage may quicken smartphone adoption, adding to the topline of device makers like Apple, even as it cuts at the bottom line of national carriers like AT&T and Verizon.

"When the deal was first announced in March it looked like we were poised for consolidation from four major players to three," wrote Moffett. "As the year closes, it looks more like we're headed from four to five (let's assume for a moment that at least one of Leap (LEAP)/MetroPCS (PCS), Dish Network (DISH), LightSquared, or Clearwire (CLWR) builds a national presence)."

For Verizon and AT&T investors, who've been wooed by the 5% dividend yields of the telecommunications sector vs. low bond returns elsewhere, a more fragmented wireless market is cause for "caveat emptor." Calling investors "coddled" by high dividend yields, Moffett wrote "we fear investors are utterly unprepared for upcoming weak wireless margins on the back of staggering iPhone subsidies."

For more on telecommunications stocks see 10 S&P 500 Stocks For 2012 from Scott Rothbort of Lake View Asset Management. For more on Apple see, 5 tech stocks to watch if QE3 happens.

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