There are so many issues to ponder about the proposed link-up between AT&T (NYSE: T) and DirecTV (NYSE: DTV) that it’s hard to know where to begin. But let’s start with short sellers. 

#-ad_banner-#For nearly a year now, a growing number of investors have become convinced that steady-as-she-goes AT&T was drifting into oblivion. By the middle of April, the short position in this stock had reached 197 million. 

Though the short position shrank by 12 million two weeks later, AT&T was still the most heavily shorted stock on the New York Stock Exchange — by a very wide margin. (AMD (NYSE: AMD) is next at 115 million shares.)

One of the key concerns for shorts: AT&T’s inability to sustain its dividend. I looked into AT&T’s myriad challenges two months ago, noting that “simply maintaining the dividend will eventually push the payout ratio above 100%.”

In announcing the deal, AT&T’s management was quick to suggest that DirecTV’s impressive cash flow will help AT&T support its dividend (currently yielding 5%). 

DirecTV generates around $8 billion a year in EBITDA (earnings before interest, taxes, depreciation and amortization), and a little less than $7 billion after interest expenses are covered. DirecTV also spends more than $3.5 billion annually on capital expenditures, so Ma Bell would likely have around $3 billion in excess cash flow to work with to support the dividend.  

	Flickr/angelrravelor
	AT&T’s move to acquire DirecTV is defensive in nature, and a way to preserve its customer base and profit margins.

AT&T believes the deal will yield $1.6 billion in capex savings by 2017, so let’s assume that around $4.5 billion in excess cash flow will be available to support the dividend. Then again, AT&T will merely add to the $4.5 billion annual interest expenses it already incurs, as it borrows billions more to pay for this acquisition. (The terms of the deal in terms of cash and stock have not been finalized.) 

So here’s the key takeaway on the dividend issue: AT&T will not likely have to cut its dividend — it can borrow a bit more for a while to cover the payouts — but the prospects of actual dividend growth look increasingly remote. Simply put, if you’re in search of growing yields, look elsewhere.

Why’s that? Because in many respects, AT&T’s move to acquire DirecTV is defensive in nature, and a way to preserve its customer base and profit margins. But it’s not likely to catapult the company to head of the pack in a fast-changing industry. A quick look at industry customer bases explains why these firms are linking up.

Competing For Market Share​

AT&T faces the prospect of ever-smaller market share if the proposed merger between Comcast (Nasdaq: CMCSA) and Time Warner (NYSE: TWC) goes through. Comcast/Time Warner would still be larger in terms of video and Internet subscribers, though AT&T/DirecTV brings a strong wireless presence to its video market share. (Wireless is still the most popular and most lucrative of these offerings.) 

If the table above makes you think that Verizon (NYSE: VZ) and Dish Networks (Nasdaq: DISH) will soon seek to merge, you’re not alone: Shares of DISH are up 55% in the past year, presumably on buyout hopes. 

How all of these proposed and yet-to-be-announced mergers will impact investors depends on one key question: Will the cable/telecom/wireless industry end up as an oligopoly that allows the few major players to boost pricing and not worry about irrational price wars? Or will there always be companies like T-Mobile (Nasdaq: TMUS) that act as a massive thorn in their side?

Perhaps the industry’s biggest wild card is Google (Nasdaq: GOOG), which is starting to expand its fiber-based business model to more cities while also exploring alternative ways to deliver wireless and broadband services. As I wrote a few months ago, Google may take meaningful market share within half a decade. And Google’s presence may lead to painful price wars among peers. 

Risks to Consider: Regulators are likely to ask for major concessions and asset sales from AT&T and Comcast as they pursue their prey, diminishing the potential benefits of these deals.

Action to Take –> The benefits for this and other proposed mergers, for investors and consumers, is a zero-sum game. Rational pricing and heightened barriers to entry will lead to higher profits and share prices. Yet too much has changed in these industries to expect continued high prices for video, wireless and broadband. These companies will seek to bundle products at ever-more aggressive prices to preserve market share, which is good for consumers but bad for investors. 

Although AT&T has made a bold attempt to return to relevance, this deal (which won’t likely be approved until 2015) is more of a ship stabilizer than a growth strategy. There are simply too many moving parts — and too many question marks regarding pricing, market share and cash flow projections — to truly be excited by this deal. The real remaining winners in this industry dance are Dish Networks and T-Mobile, which may soon receive flattering buyout offers of their own — but their current share prices likely already reflect much of the remaining upside that a buyout would bring.

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