WASHINGTON, November 20, 2017 – Giant telecommunication company AT&T (more than $160 billion in annual sales) still hopes to purchase the Time Warner Company for $85 billion. Most view this merger as primarily a vertical merger, a transaction that typically gets routinely easy approval from the U.S. Department of Justice (DOJ).
But, although a similar Comcast-NBC/Universal merger was approved went through relatively unscathed in 2011, this time around, things may be a bit different for the proposed AT&T/Time Warner deal.
A Vertical Merger
In business, a vertical merger or acquisition occurs when one company decides to buy another company that currently serves as its supplier. An early example of this was back in the day when retailer Sears (now Sears Holdings) purchased Craftsman tools, one of its key suppliers. Another example: Ford Motor Company’s purchase of prime supplier Autolite, a manufacturer of spark plugs.
Due to anti-trust laws currently on the books, the Justice Department must approve deals of similar size to ensure that the corporate takeover or merger transaction does not result in a monopoly. But the deals that frequently raise questions with the DOJ are horizontal acquisitions and mergers. These occur when one company is buying or merging with one of its competitors.
One prominent, relatively recent example was the 1998 purchase of Mobil Oil by competitor Exxon. Both companies were, at the time, giants of the American oil industry. After much scrutiny and debate, DOJ approved the sale, noting that even if the resulting company would be America’s largest energy company by far, there was still sufficient competition in the oil and energy market, assuring the newly-merged company would not have monopoly power.
Sirius Satellite Radio merger with XM Satellite Radio
Such cases, however, are not always clear-cut. Take, for example DOJ’s more recent approval of the Sirius Satellite Radio/XM Satellite Radio merger. Then as now, the subscription-based satellite radio business consisted of only two companies, neither of whose business models was sufficiently successful on a financial basis. On the surface, the proposed merger would result in a single company that essentially controlled the entire satellite radio business, generally the very definition of a monopoly.
But both companies argued that without the merger, neither company would be able to financially survive. Further, they reasoned, if the market for this novel delivery of radio ever did expand at some point in the future, there would still be nothing to stop another firm from entering the market to offer a similar service. It was essentially that argument that clinched the deal for what is now SiriusXM.
AT&T – Time Warner Merger
Yet the AT&T case, clearly the kind of vertical transaction that generally wins government approval, marks the first time an entertainment distributor has proposed to purchase a producer of premium news and entertainment entities. Because Time Warner’s Turner Broadcasting subsidiary owns many networks including TBS, CNN, HBO and TNT, which produce some original content, Time Warner’s acquisition by AT&T could arguably end up limiting the distribution of this original content to competitors like Comcast and Verizon among others.
Further, the proposed merger could also mean the AT&T has an unfair advantage when competing with other wireless carriers, since AT&T can offer free HBO or some HBO original content as an incentive to new customers of AT&T wireless. Could these examples create an unfair advantage for AT&T? Would AT&T be gaining monopoly power?
The DOJ may also argue that the merger of an entertainment producer an entertainment distributor could also limit to the ability of new firms to enter the market, should a company like AT&T exercises monopoly power by charging abnormally high prices to competitors for their products or services.
DOJ’s power to Merger Block
In the past, DOJ has blocked many large mergers, including the recent scuttling of Comcast’s proposed acquisition of Time Warner as well as Halliburton’s scuppered acquisition of Baker Hughes, and Anthem’s acquisition of Cigna.
Further back in U.S. history, DOJ broke up John D. Rockefeller’s massive Standard Oil Company, a vertically integrated monopoly. U.S. trustbusters they controlled about 90% of refining capacity in America while serving at the same time as a major retailer of gasoline. This was effectively the unwinding of an existing monopoly, not the blocking of a potential one.
In this instance, DOJ claimed that controlling the supply of refined oil would limit the competition from retailers in the market. By controlling the refineries, Standard Oil had gained monopoly power in the oil industry. Standard Oil has broken up into 34 separate companies.
The AT&T Monopoly
In similar fashion, the original AT&T, a monopoly that was actually permitted by the Federal government to advance telephonic and telegraphic technologies, was broken up in the 1980s to foster opportunities for technological innovation.
The company’s resulting split into a series of “Baby Bells” was what created companies like today’s Verizon, CenturyLink and SBC Communications, the latter of which eventually adopted the old mother company’s original name: AT&T.
Regarding the current AT&T offer to purchase Time Warner, the transaction should be approved by AT&T. The merged company will operate more efficiently in its industry space and be in a better position to compete with Netflix and Amazon as well, both of whom provide original and purchased content for their customers. As these and other increasingly numerous other options become available, viewers will continue to exercise their option to “cut the (cable) cord” and cancel superfluous cable TV services, something that actually poses a major threat to AT&T and its DirecTV subsidiary.
AT&T would not likely withhold original content from other distributors simply because it is much more profitable to sell the original productions to the companies competitors as well as distributing it exclusively. Proof? Since the Comcast/NBC-Universal merger, there has been no negative impact on competition. In fact, competition seems to have increased since the merger, which fact tends to prove the point.
The Merger Economy of Scale
DOJ must weigh the benefits of economy of scale that would result in lower costs for the combined firm and lower prices for consumers versus the potential reduction in competition. This is always a tricky determination, primarily due to the lack of historical data. As such, lawyers for both sides will find instances in history that support their conflicting positions.
In the end, DOJ will likely approve this deal, although the newly-combined company may be forced to divest parts of Time Warner. Similarly, when Exxon and Mobil joined forces, the new company had to sell specific assets to avoid the possibility of monopoly power in any of its markets.
Currently languishing in legal limbo, the acquisition of Time Warner by AT&T should ultimately be approved by the U.S. Department of Justice (DOJ). In the final analysis, this merger will be a good thing for the American consumer.