The Importance of United States v. AT&T-Time Warner
In November of 2017, much to the surprise of industry watchers, the United States Department of Justice filed a lawsuit to block the AT&T’s proposed $85.4 billion acquisition of Time Warner. This case has drawn significant attention because many believe that the Government’s case was pushed by President Trump to punish Time Warner’s CNN for unfavorable coverage of his presidency and little to do with antitrust violations. Makan Delrahim, the Department’s Antitrust chief, has denied this charge.
The case went to trial in March of 2018 and concluded on April 30th. The decision is now in the hands of Judge Richard Leon of the U.S. District Court for the District of Columbia and is expected to be read on June 12, 2018.
The decision by Judge Leon will have huge ramifications for the future of television.
So Why Is This Case So Unusual?
Generally, the type of M&A activity challenged by antitrust regulators is a horizontal merger, where two businesses that compete against each other merge. According to the Federal Trade Commission’s website, section 7 of the Clayton Act prohibits mergers and acquisitions when the effect “…may be substantially to lessen competition, or to tend to create a monopoly.” The site also states that the greatest antitrust concerns arise from horizontal mergers.
In this case, AT&T and Time Warner are not direct competitors. AT&T is a cellular network and video distributor (U-Verse and DirecTV), whereas Time Warner is a video producer (CNN, TNT, and HBO). This type of merger is known as a vertical merger. The bar for proving anti-competitive behavior is not only much higher for vertical mergers, but also rarely prosecuted. In fact, the last time a vertical merger was tried was in 1977 (United States v. Hammermill) and the last time the Government successfully blocked a Merger was in 1972 (Ford Motor Co v. United States).
Adding to the unusual nature of this case is the fact that the Trump Administration has built a lassiez-faire reputation towards M&A, signaling the approval of Discovery-Scripps, Verizon- Straightpath, and Disney-Fox mergers, to name a few.
In this case, the Department of Justice had the burden to prove that this vertical merger would be in violation of Section 7 of the Clayton Act — that is, the merger would likely lessen competition in the marketplace. The Justice Department argued AT&T, which owns DirecTV, would extract higher prices from other pay-TV distributors by threatening to withhold Time Warner’s TV networks. The DOJ also relied on a model submitted by Professor Carl Shapiro, a graduate professor at UC Berkeley Haas School of Business. Shapiro’s model showed that the merger’s impact would raise pay-TV prices by more than $400 million per year.
Meanwhile, AT&T testified that if it has any hope of competing in a marketplace increasingly driven by streaming media, the merger is necessary. AT&T also argued that it would make no sense to withhold Turner content because it would cost dearly to do so. The reality for AT&T is that its satellite business is declining, and this merger would increase competition by enabling the newly merged company to compete with the likes of Netflix and Amazon, companies that are both content producers and distributors.
Reading through the case, especially the expert testimony, the DOJ failed to prove its case. The bar was high to begin with and the DOJ did little to prove there was any violation of the Clayton act. Furthermore, the government appears to have based its models on data that did not address the realities of the current media marketplace. It would be a shock to see this case be decided in favor of the federal government.
Did President Trump Tell the DOJ to Pursue this Case?
It is highly unlikely that President Trump made any direct overtures to the DOJ to pursue this case. However, what we do know is that President Trump consistently spoke out against the deal as a candidate and weighed in against the deal as President. We also know that President Trump has a disdain for CNN, and his “dog whistles” may have swayed the DOJ in its decision to purse this case.
At the end of the day, Judge Leon ruled that there was no evidence to prove that there was undue influence or retribution was the rationale for the case.
By pursuing this case, the Justice Department has put a temporary pall on M&A activity, and should AT&T prevail, there is a consensus feeling that M&A activity will continue at a torrid pace (as we speak, Comcast is preparing to up its bid for 21st Century Fox to $60 billion, undoubtedly igniting a bidding war with Disney).
Should the DOJ prevail in this case, it could cast a cloud over future M&A activity. Investment bankers like certainty, and a successful block of this merger would cause great unease. In addition to cooling off the current media M&A market, rumors abound that many other businesses mergers will be impacted, including the healthcare industry, as a successful challenge would give regulators a strong legal precedent to block deals such as the $69 billion CVS-Aetna deal.
At the end of the day, TDG believes that the AT&T-Time Warner merger will be allowed to proceed. Either way, we’ll take a close look at the judge’s reasoning.
Stick with TDG and stay ahead of the curve.
A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.