Telecom Mergers: Buy Stocks Now or Hold the Line?

Mergers and acquisitions can cause sharp upticks or declines in the stocks of participating companies, creating short-term investment opportunities.

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Mergers and acquisitions are a natural part of the market and common for both publicly traded and privately owned companies. Acquisitions are an instrument of growth and allow businesses to expand their reach and enter different markets. In contrast, mergers seek to create an entity that combines the strength of both merging companies and undermines the weaknesses.

Typical mergers and acquisitions can create decent investment opportunities for investors, as they may cause short-term spikes (or slumps), both of which may be attractive to investors. But if a merger leads to significant consolidation within a sector, its consequence may seep out of the two merging entities and to the other constituents of the sector.

The Competition Bureau of Canada has safeguards against such mergers, but their primary goal is consumer protection and not protecting one corporation from over-strengthening another. One such merger closed earlier this month, and you may be wondering whether you should buy into the sector or hold on for now.

A new telecom giant

Rogers Communication (TSX:RCI.B) was already among the three telecom giants in Canada and had one of the highest wireless subscriber counts. It also gets the top spot among the 5G stocks in Canada. But now that it has acquired the fourth-largest telecom company in the country, its presence and market penetration has grown by a substantial margin.

The merger cost Rogers about $26 billion, including the debt of $6 billion, making it one of the most significant deals in the sector’s history. Rogers already had dominance in the wireless telecom sector in Canada, and this merger will also help it dominate the cable video market domain.

It wasn’t a sudden merger and was in the works for at least a couple of years, but even then, the finalization didn’t give the stock a significant enough boost to create a short-term investment opportunity. However, the long-term impact of this merger has yet to unfold.

Another telecom giant

Telus (TSX:T) tried to slow down and possibly stop the merger from happening, but to no avail. The idea was that this deal would disrupt the level playing field the three Canadian telecom giants operated in (so far).

However, if we look at the number of subscribers in different operational domains (wireless, broadband, etc.) and the regional penetration, the deal may not have radical consequences for Telus. The most significantly impacted domain would be networking.

It would be naive to see that Telus wouldn’t face the consequences of this deal in the long term, but its fundamental strengths still hold and may allow it to keep growing at a decent enough pace going forward. It has operational diversity, and, as a stock, it offers a healthy combination of secure dividends and consistent growth.

Foolish takeaway

If you were planning on buying any one of the two blue-chip stocks from the telecom sector to hold for long term, the merger shouldn’t divert you from the path. But if you were hoping to leverage the sharp movements in telecom stocks created by the merger, you would be disappointed.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Rogers Communications and TELUS. The Motley Fool has a disclosure policy.

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