Speculators took a hammering overnight when Verizon Communications Inc. (NYSE:VZ) announced it would buy Straight Path Communications Inc (NYSEMKT:STRP) for $184 per share, or roughly $3.1 billion. And why STRP stock ultimately lost is an interesting story.
Straight Path stock has been on a straight path upward for a little more than a month, ever since AT&T Inc. (NYSE:T) announced it would pay $1.6 billion for the “millimeter wave” spectrum owner. This is spectrum at anywhere from 26-39 GHz, first used for satellite TV, but now seen as key to future Internet services like the internet of things.
Arbitrageurs, who buy stocks under takeover threat, then sell them to the eventual winner of the takeover battle, were thrilled to see Verizon step in and began bidding up STRP stock.
But there had to be a winner in this poker game. Someone had to fold. Someone had to take the pot. Verizon has, but its price is well below what speculators thought it would be.
The Straight Path to 5G
Speculation sent Straight Path shares to a high of almost $224 per share on May 10. The price collapsed 20% overnight, to an opening bid May 11 of $178.30, just enough below the $184 per share Verizon offered — the difference being there to compensate today’s buyer for keeping his money in until closing.
The high-frequency spectrum at issue has long been a source of technology controversy. No one, especially STRP, knew what to do with it, and the spectrum wasn’t being turned into services.
Now we have a clear idea of how to use it.
It’s going to be part of the 5G plans that dramatically increase wireless Internet bandwidth for things like the IoT. The Federal Communications Commission, knowing this, now wants to clean things up, auctioning off more spectrum, then swapping or reassigning various bands so they are wide enough to be useful.
This is where the Straight Path assets fit in. They can easily be used as leverage to get their owner power in the auction, to assure them a good situation down the road. The new FCC seems willing to make deals on behalf of private parties, so assets that seemed worthless under Obama now look like, well, Trump cards.
If you got into STRP stock before the AT&T bid, when the stock was selling at about $35 per share, you’re in great shape. If you came in during May, expecting a quick killing, you’re skint.
Before you rush out and buy a ton of Verizon stock, let’s look at the other side of the coin.
The Other Players
It’s easy to see why AT&T wanted Straight Path. AT&T plans to extend the reach of DirecTV with a land-based wireless service called DirecTv Now, and it has already staged a trial of its service, using equipment from Nokia Oyj (ADR) (NYSE:NOK). Regular readers of InvestorPlace will identify Nokia as being out of the consumer side of the business and all-in on the network equipment side.
AT&T had bought a bankrupt company called FiberTower for its high-frequency assets. Straight Path was the second part of its plan. Losing that spectrum to Verizon is a setback, but the company figures there will be other auctions, and it can still build-out what it wants.
AT&T is not out of 5G by any means.
Then there is T-Mobile US Inc (NASDAQ:TMUS). They got some of this high-end spectrum when they bought MetroPCS in 2012. They are not in all markets, no one is, but again the coming FCC auction of spectrum is supposed to clear things up. They will have an opportunity to get a national footprint soon.
Now that Verizon has Straight Path, they figure to have the whip hand as the FCC prepares to make the spectrum useful, putting into the hands of national cellular networks for use in delivering Internet bandwidth.
Just don’t expect there to be one winner. There should be three, which is why AT&T was finally willing to let STRP go Verizon’s way, and why those arbs who were late to the party now find that all the cake has been eaten and they’re left with the bill.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.