A Blog by Jonathan Low


Jun 13, 2018

The Implications of the Court's Approval of the ATT-Time Warner Merger

Happy days are here again for proponents of big mergers and acquisitions. In media, tech and health care, more consolidation can be expected.

But in the longer term, increased concentration will probably mean higher costs and less opportunity for innovation - and for competition. As the evermore oppressive nature of that concentration becomes apparent, this could change - as it has in the past. JL

Dan McCrum reports in Alphaville and Adam Levy in Motley Fool:

The DOJ hasn't tried to block a vertical merger since the 1970s. (But) "the current framework in antitrust—pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. We cannot cognize potential harms to competition if we measure competition primarily through price and output. Current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive."
Alphaville The headline is from the first paragraph of the judicial decision handed down Tuesday which, along with a surprising display of judicial exclamation markets, allows the AT&T-Time Warner mega merger to proceed:

Turn to pages 53 to 59 for some of the key analysis on the application of anti-trust law to vertical mergers. As the judge writes, the Department of Justice hasn't tried to block vertical mergers - a company in one business buying a supplier or customer, rather than a competitor - since the 1970s, producing a dearth of modern case law.

The 1970s was a period when there was a substantial intellectual shift in the approach to regulation of business in general and anti-trust enforcement in particular.
The Chicago School had begun its embrace of neoclassical economics. Attitudes towards business were changing as competition between businesses began to be viewed more as a positive force, one did not require trust-busters and regulators to police.
Then in 1977 came two Supreme Court decisions, first Brunswick Corp. v. Pueblo Bowl-O-Mat and then Continental TV v. GTE Sylvania. Anti-trust was tilted firmly away from away from hard and fast per se rules to questions of efficiency and competition, or standards of reason. What was once black and white turned grey.
So the decision matters in part because there has been a debate argument in antitrust legal circles about the merits of a return to a more historical approach of conceptions of market power. For instance, see a paper in the Yale Law Journal from last year titled Amazon's Antitrust Paradox:
This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. 
Amazon, obviously, disagrees and sees itself as the consumer's friend. The AT&T case suggests those who want a different approach may have to persuade Congress to legislate for a different direction. That a digital repository of 25m books languishes unread at Google for want of similar action, suggests a long wait ahead.
Still, one thing to watch might be what the government regulators do in the future. It looks like the government failed to persuade the judge of its case on the question of negotiating leverage.
In the absence of case law, it effectively set out to show that a consolidated group would have more negotiating leverage to push up prices, which would be bad for consumers. See pages 72 to 108, and particularly the section which follows on the academic underpinnings of this approach from the government's expert witness, professor Carl Shapiro.
See page 110, for instance:

Imagine the effect of legislation to shift the burden of proof - the judge's sceptical exclamations would probably apply to the company presenting a theory of why it would never its abuse negotiating leverage.
In the absence of new law, one route for the DoJ might be to create case law. Antitrust lawyers are welcome to chip in below on the feasibility, but were the government to successfully prosecute actual abuses of market power, perhaps starting with companies built by vertical merger, the evidence might accrue.
Such an approach might have to wait for a change of administration, but there are surely plenty of ambitious prosecutors looking to make reputations.

Motley Fool
A federal judge on Tuesday approved the merger of AT&T (NYSE:T) and Time Warner (NYSE:TWX) after a six-week trial. While the decision will allow AT&T to move forward with its $85 billion acquisition, it will also have a much broader impact. The ruling opens the door for more massive corporate mergers and acquisitions in the media and telecom space, which could have a big impact on investors.
Here are three big implications of the AT&T-Time Warner decision.

Comcast could swipe Fox from Disney

Disney (NYSE:DIS) agreed late last year to acquire most of the cable and movie studio assets of Twenty First Century Fox (NASDAQ:FOXA). The move would make Disney more of a behemoth in television and movies, and enable it to compete with big streaming services by adding even more content to its own direct-to-consumer offering.
Meanwhile, Comcast (NASDAQ:CMCSA) has been eyeing both Fox and Sky Networks, the European pay-TV giant. Fox owns a 39% stake in Sky and has a bid of its own to acquire the rest of the company.
Comcast had reportedly prepared an all-cash offering for Fox even before the court announced the AT&T-Time Warner decision. Fox's management had said it prefers a deal with Disney because it believes it would be easier to gain regulatory approval, but with the recent court decision, that objection may be moot.
As a result, the decision is great news for Fox. Comcast investors may be excited by the news, as it would give the company the opportunity to buy both Fox and Sky, but those acquisitions would weigh heavily on the company's balance sheet. Conversely, the ruling is bad news for Disney, which might have
to go back to the drawing board with Fox.

Odds of a T-Mobile and Sprint merger just improved

When T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) announced their planned merger, shares of both companies fell along with shares of AT&T and Verizon. The only explanation for the decline in share price across the board is the market's fears over whether the merger will be approved. The AT&T-Time Warner decision should mitigate those concerns and send stock prices higher across the board.
T-Mobile and Sprint merging provides the two companies with enough scale to take advantage of the huge fixed costs associated with operating a wireless network. The combined companies should be able to produce operating margins more closely in line with the wireless operations of Verizon and AT&T. T-Mobile's CFO, Braxton Carter, expects about $37 billion in synergies from combining the wireless networks and retail operations, among other things.
Without the need to scale, Sprint and T-Mobile may reduce the aggressiveness of their pricing and promotions, which could lead to better margins at AT&T and Verizon as well.

Vertical healthcare mergers should go through, too

There are two large mergers in the healthcare industry that are under scrutiny as well. CVS (NYSE: CVS) and Aetna (NYSE: AET) agreed to a $69 billion merger last October. The combined company would include a tripod of healthcare services including a retail pharmacy, a health insurer, and a pharmacy benefits manager. That's some significant vertical integration that would create quite an advantage over competitors.
Meanwhile, Cigna (NYSE: CI) agreed in March to buy Express Scripts (NASDAQ: ESRX) in a deal worth more than $50 billion in cash and stock. That would give Cigna two legs -- health insurance and a pharmacy benefits manager -- and put it on par with some of its larger competitors that have their own PBMs.
The increased likelihood of these vertical integration mergers going through following the AT&T-Time Warner decision should encourage investors. So far, that seems to be the case -- share prices for all four companies rose after the decision.

Broader implications

The AT&T-Time Warner decision makes it likely we will see many more of these large mergers and acquisitions by setting a precedent for a more hands-off approach to regulation. Fears of potential merger breakups should diminish, and it could lead to a lot more activity over the next few years. Investors would be wise to keep this bellwether case in mind moving forward, but that doesn't necessarily mean changing course to focus on companies only because they might be acquired.


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